CONTENTS · 2020. 7. 7. · CONTENTS 3 - 29 Report of the Board of Trustees 30 Statement of...

CONTENTS

3 - 29 Report of the Board of Trustees

30 Statement of Responsibility by the Board of Trustees

31 Statement of Corporate Governance by the Board of Trustees

32 - 35 Independent Auditor’s Report

36 Statement of Financial Position

37 Statement of Comprehensive Income

38 Statement of Changes in Funds and Reserve

39 Statement of Cash Flows

40 – 100 Notes to the Financial Statements

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REPORT OF THE BOARD OF TRUSTEES

The Board of Trustees has pleasure in presenting its report for the year ended 31 December 2019

1 Description of Fedhealth Medical Scheme

1.1 Terms of registration

Fedhealth Medical Scheme (the Scheme/Fedhealth) is a not-for-profit open medical scheme registered in terms of the Medical Schemes Act no. 131 of 1998, as amended (the Act). It is registered (Registration number 1202) with and regulated by the Council for Medical Schemes (the Council).

The Scheme exists for the benefit of its members. The Board of Trustees of the Scheme (the Board) oversees and governs the business of the Scheme on behalf of its members.

1.2 Benefit options within Fedhealth Medical Scheme

The Scheme provides three product ranges and a low cost option, MyFed. The product ranges caters for market segments at

different life stages from comprehensive options, MaxiFed (Maxima Plus, Maxima Exec and Maxima Exec GRID) for conservative

and sicker members to discounted options, FlexiFed, for young and healthy members. The more comprehensive options have higher benefit limits, lower co-payments and better day-to-day benefits. At every life stage a member can select an option that meets their needs with regard to affordability and the freedom of provider choice. The more limited the choice the higher the contribution discount compared to unrestricted options. In addition to the risk benefits covered in the options above, FlexiFed options gives members access to an interest-free loan

facility. The ELECT and GRID options are efficiency discount options (EDO), which contain the same level of benefits as the main

options at a discounted contribution rate. For these options, medical services should be obtained from the Scheme Networks. Note 16 of the financial statements provide further detail. Options per life stage:

Comprehensive for

Conservative and Sickly

•Maxima Plus

•Maxima Exec

•Maxima ExecGRID

Low Cost

•MyFed

Young and Healthy

• FlexiFed 1

• FlexiFed 1 ELECT

Family Startup

• FlexiFed 2


• FlexiFed 2 GRID

Young Family

• FlexiFed 3


• FlexiFed 3 GRID

Mature Family

• FlexiFed 4


• FlexiFed 4 GRID

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REPORT OF THE BOARD OF TRUSTEES (continued)

1 Description of Fedhealth Medical Scheme (continued)

1.3 Personal medical savings accounts (PMSA)

The Scheme offers members a savings account on the MaxiFed and FlexiFed options as set out above. The FlexiFed options savings contributions are significantly lower to give members access to an interest-free loan facility. These accounts assist members in managing cash flows for the payment of healthcare services for which they are responsible. PMSA monies are managed on behalf of the members in terms of the Scheme rules.

The full annual amount is available immediately, although the members only contribute towards this monthly in arrears. In the event that a member’s PMSA is exhausted before the member has paid all of the monthly contributions, the Scheme will recognise a receivable for the advance.

The savings may only be used for healthcare services and are only refundable as provided in Regulation 10 of the Act. These savings accounts may not be utilised to provide for benefits and co-payments relating to Prescribed Minimum Benefits (PMBs).

Active members earn 4% interest (2018: 4%) on their accumulated savings. In terms of the rules of the Scheme, the PMSA liability is underwritten by the Scheme.

PMSA balances are refundable when a member leaves the Scheme or transfers to a medical scheme option which does not have a PMSA. All refunds and transfers are paid in terms of the Scheme's rules.

1.4 Loans to Members – MediVault transferred to Wallet

The FlexiFed options give members access to an interest-free loan facility called the MediVault Benefit. The amount allocated can be used to pay for day-to-day medical expenses and is based on the member’s selected option and family composition. These funds are not pro-rated based on the member’s join date and can be accessed at any time during the year. To access these funds the member is required to accept the terms and conditions before transferring an amount, in full upfront, or in part as needed in their Wallet. The member only has to pay back the money transferred from the MediVault to the Wallet – interest free over a period of twelve (12) months. Day-to-day benefit claims are funded from available savings, thereafter the member’s Wallet account if activated, or self-funded.

1.5 Risk transfer arrangement

The Iso Leso Optics Ltd (Iso Leso) contract is disclosed in these financial statements as the only risk transfer arrangement.

Iso Leso Optics Ltd

Iso Leso’s primary objective is to manage eye care for MyFed members and their dependants. The benefits are designed to meet the basic clinical needs of its members.

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1 Description of Fedhealth Medical Scheme (continued)

1.5 Risk transfer arrangement (continued)

Iso Leso Optics Ltd (continued)

Iso Leso also advises the Scheme on future optical benefits, clinical issues, trends and more particularly, ensures functional vision is achieved within the framework of the optical benefits available to MyFed members.

Iso Leso receives a capitation fee in respect of all MyFed members for visits to optometrists for their comprehensive eye examination, single vision and bifocal spectacles.

1.6 Insurance risk management

The primary insurance activity carried out by the Scheme is to assume the financial healthcare benefits received by members and their dependants are in terms of the rules of the Scheme. This risk relates to the health of the Scheme’s members. As such the Scheme is exposed to the uncertainty surrounding the timing and severity of claims under each medical insurance contract.

The Scheme manages its insurance risk through benefit limits and sub-limits, approval procedures for transactions that involve pricing guidelines, pre-authorisation and case management, service provider profiling and monitoring of emerging issues.

The Scheme uses several methods to assess and monitor insurance risk exposures both for individual types of risks insured and overall risks. These methods include internal risk measurement models, sensitivity analysis, scenario analysis and stress testing. The theory of probability is applied to the pricing and provisioning for a portfolio of insurance contracts. The principal risk is that the frequency and severity of claims is greater than expected.

Insurance events are, by their nature, random and the actual number and size of events during any one year may vary from those estimated with established statistical techniques. There are no changes to assumptions used to measure insurance assets and liabilities that have a material effect on the financial statements and there are no terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of the Scheme’s cash flows.

1.7 Fedhealth Amalgamation with Topmed Medical Scheme (Topmed)

An amalgamation between Fedhealth and Topmed (Registration number 1422) was confirmed and effective from 1 August 2019 in terms of Circular 55 of 2019 issued by the Council on 31 July 2019. The amalgamation involved the assets, liabilities and members’ funds of Topmed being transferred to Fedhealth, effective 1 August 2019, for no cash consideration.

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2 Management

2.1 Board of Trustees Board of Trustees in office during the year under review and at the date of this report are as follows:

T Jackson Chairman (Trustee)

M Govender Vice Chairman (Trustee)

N Byrne Trustee Appointed 1 August 2019

J Cloete Trustee Re-elected 25 July 2019

M Duly Trustee

G Eloff Trustee Re-elected 25 July 2019

A Fourie Trustee Appointed 1 August 2019

P Hemus Trustee

Dr M Mojapelo-Mokotedi Trustee

C Norton Trustee

N Parker Trustee Re-elected 25 July 2019

D Tretheway Trustee Appointed 1 August 2019

J Viljoen Trustee Appointed 1 August 2019

2.2 Principal Officer

J Yatt

2.3 Registered office address and postal address of the Scheme C/o Medscheme Holdings (Pty) Ltd Medscheme Office Park 37 Conrad Street Florida North Roodepoort 1709

Private Bag X3045 Randburg 2125

www.fedhealth.co.za

2.4 Employees

Scheme Operational Executive: T Endersby Commercial Executive: M Morton

C/o Medscheme Holdings (Pty) Ltd Medscheme Office Park 37 Conrad Street Florida North Roodepoort 1709


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2 Management (continued)

2.5 Scheme administrator during the year

Medscheme Holdings (Pty) Ltd (Medscheme) Private Bag X3045 Medscheme Office Park Randburg 37 Conrad Street 2125 Florida North Roodepoort 1709

Administrator accreditation number: 21 Topmed winddown Private Health Administrators (Pty) Ltd (PHA) 70 Buckingham Terrace Westville 3629 Administrator accreditation number: 11

P O Box 343 Westville 3630

2.6 Scheme managed care administrators during the year

Medscheme Holdings (Pty) Ltd Medscheme Office Park 37 Conrad Street Florida North Roodepoort 1709

P O Box 1101 Florida Glen 1708

Managed care accreditation number: 53 Aid for Aids Management (Pty) Ltd Medscheme Office Park 37 Conrad Street Florida North Roodepoort 1709

P O Box 1101 Florida Glen 1708

Managed care accreditation number: 94 Topmed winddown Private Health Administrators (Pty) Ltd 70 Buckingham Terrace Westville 3629 Managed care accreditation number: 39

P O Box 343 Westville 3630

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2.7 Investment managers during the year

Old Mutual Wealth Trust Company (Pty) Ltd 2nd Floor, 1 Mutual Place 107 Rivonia Road Sandton 2196

P O Box 2444 Saxonwold 2132

Financial service provider number (FSP): 18427

Taquanta Asset Management (Pty) Ltd 7th Floor, Newlands Terraces Boundary Road, Newlands Cape Town 7700

P O Box 23540 Claremont 7708

FSP: 618 Sanlam Investment Management (Pty) Ltd 55 Willie van Schoor Avenue Bellville 7536

Private Bag X8 Tyger Valley 7530

FSP: 579 Sanlam Private Wealth (Pty) Ltd

Private Bag X8

55 Willie van Schoor Avenue Bellville 7536 FSP: 37473

Tyger Valley 7530

Truffle Asset Management (Pty) Ltd Ground Floor, Lancaster Building Hyde Park Lane Business Complex Corner William Nicol Drive and Jan Smuts Avenue Hyde Park 2196

P O Box 535 Pinegowrie 2123

FSP: 36584 Prudential Investment Managers (SA) (Pty) Ltd 7th Floor, Protea Place 40 Dreyer Street Claremont 7708

P O Box 23167 Claremont 7735

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2.7 Investment managers during the year (continued) Allan Gray (Pty) Ltd 1 Silo Square V&A Waterfront Cape Town 8001

FSP: 6663

2.8 Asset consultant during the year

Simeka Consultants & Actuaries (Pty) Ltd Simeka House The Vineyards Office Estate 99 Jip de Jager Street Bellville 7532

FSP: 13900

P O Box 51318 V&A Waterfront Cape Town 8002 P O Box 350 Sanlamhof 7530

2.9 Actuary

Medscheme Holdings (Pty) Ltd The Boulevard, Buildings F & G Searle Street Woodstock 7925 Accreditation number: 53

P O Box 38632 Pinelands 7430

Topmed Actuary

Cadiant Partners Actuarial and Consulting Solutions (Pty) Ltd 2nd Floor, 3 Gwen Lane Sandton

Private Bag X24 Sandton 2146

2196

FSP: 44415

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3 External Auditor

KPMG Inc. 85 Empire Road Parktown Johannesburg 2193

Private Bag 9 Parkview 2122

4 Internal Auditor

AfroCentric Health Ltd Medscheme Office Park 37 Conrad Street Florida North Roodepoort 1709


5 Scheme Committees

The Scheme's governance structure comprises seven committees. Each Committee of the Board has terms of reference which set out the structures and functions of that committee. The terms of reference are reviewed by each committee and approved by the Board annually.

5.1 Investment Committee

The membership, authority and duties of the Investment Committee are governed by terms of reference set by the Board. The Scheme’s investment strategy takes into consideration both constraints imposed by legislation and those set by the Board.

The Investment Committee comprises: Chairman: P Hemus Trustee: T Jackson Trustee: G Eloff Trustee: D Tretheway Advisor: W le Roux (From Simeka Consultants and Actuaries (Pty) Ltd)

The mandate of the Investment Committee is to:

review the investment strategy and policy documents annually and recommend changes to the Board as necessary;

review the effectiveness and the achievement of the objectives of the investment policy/strategy;

oversee the criteria and process for the selection of external investment managers;

recommend the contractual arrangements for the investment managers and investment consultants;

monitor investment and fund manager performance;

review performance of the investment portfolio against targeted benchmarks and, if performance results are unacceptable, consider what changes that may be required;

recommend all investment transactions;

ensure compliance with applicable legislation; and

report regularly to the Board on committee activities, issues and related recommendations.

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5 Scheme Committees (continued)

5.1 Investment Committee (continued)

The Trustees are confident that the Scheme’s investment strategy is well set up to benefit from long-term growth, but also to absorb short-term shocks that tend to be felt from time to time.

The Scheme achieved a return of 10.6% (2018: 5.4%) over the year of 2019 for the invested funds (including assets that were transferred from Topmed), against the inflation rate of 3.6% (2018: 4.4%) and the Scheme’s internal benchmark (CPI +3.5%) of 7.1% (2018: 7.9%). The historic Fedhealth assets (invested between Sanlam Investment Management (Pty) Ltd (SIM), Taquanta Asset Management (Pty) Ltd (Taquanta) and Truffle Asset Management (Pty) Ltd (Truffle) provided even more impressive returns than the 10.6% reported above. The returns achieved by the Scheme were exceptional – particularly when considering the risk-controlled investment strategy employed to limit potential downside returns. The Taquanta and SIM portfolios did particularly well, driven by very good asset selection within the interest-bearing investment market (bonds and cash). The Scheme therefore met the internal target of CPI +3.5% quite comfortably during 2019. The return over the last 3 years (2017 - 2019) was 8.9% (2018: 7.1%, 2017: 7.9%) against a benchmark of 8.05% (2018: 9.0%, 2017: 9.1%), reflecting a strengthening of long-term performance against the benchmark.

The Scheme had an effective equity asset exposure (excluding property) of 28.5% at 31 December 2019 (2018: 19.7%). The weighted average interest earned on cash and cash equivalents was 6.9% (2018: 7.5%).

Section 35(8)(a), (c) and (d) of the Act sets out the prohibition of investments in an employer who participates in the medical scheme or in any medical scheme administrators. The Scheme is currently invested in Discovery Holdings Ltd, Liberty Holdings Ltd, MMI Holdings Ltd, Sanlam Life Insurance Ltd and Sanlam Ltd through portfolios managed by underlying investment managers. The Council renewed the exemption on 5 February 2019 and the exemption was granted for a period of 12 months, effective 1 February 2019. and further exemption to 1 February 2021 has been applied for.

In 2019, the FTSE / JSE All Share Index produced 12.1% (2018: -8.5%) and other indices also performed positively. This was a conducive environment for investing in equities. Truffle is an aggressive balanced portfolio and is expected to have 50% or more of its assets invested in shares over time. Over this particular calendar year, Truffle posted a return of 16.0% (2018: 2.4%).

Bond yields offered investment opportunities over the year, which were exploited efficiently by Taquanta, which does not invest in equities, but in cash and bonds and other interest bearing instruments. Taquanta delivered 11.8% (2018: 10.7%). return for the year.

The SIM portfolio is a low risk absolute return portfolio, with the aim not to erode capital over any 12 months. Its risk level falls between that of the Truffle and Taquanta portfolios. 2019 was a year where the imperative was to try and protect the Scheme from any losses over the calendar year, which SIM was able to do, delivering 10.1% (2018: 2.1%).

The Board monitors the Committee’s performance against the related terms of reference. No deficiencies were noted relating to the 2019 financial year.

The assets of Topmed were transferred to Fedhealth on 1 August 2019. The investment strategy of the former’s assets were tweaked to be more in line with that of the latter’s, but without applying whole scale change. This was effected at the end of 2019. The return on the assets coming from Topmed was slightly lower than the historic Fedhealth assets, but was still commendable.

5.2 Risk and Legal Committee

The membership, authority and duties of the Risk and Legal Committee are governed by terms of reference set by the Board.

The Risk and Legal Committee comprises: Chairman: G Eloff Trustee: T Jackson Trustee: N Byrne Trustee: D Tretheway Trustee: N Parker Trustee: J Viljoen Trustee: M Govender (Resigned from the committee 31 July 2019)

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5.2 Risk and Legal Committee (continued)

The mandate of the Risk Committee is to:

consider the level of governance in the various aspects of the functioning and activities of the Board;

review policy, draft policy proposals and monitor good governance in respect of procedures by the Board and the Scheme in general and make recommendations to the Board;

develop and maintain a risk control framework in line with best practice to ensure that risk management efforts are integrated and optimised throughout the Scheme;

ensure that risk policies and strategies are aligned to key Scheme objectives and effectively managed;

develop reporting guidelines which focus on stakeholder expectations and provide assurances on the adequacy and effectiveness of the risk management function within the Scheme;

ensure that risk awareness activities are put into practice at Scheme operational levels;

ensure that risk identification, measurement and control methodologies result in effective mitigation of risks facing the Scheme;

entrench a risk control framework into everyday operations which focuses on automated systems and human capital;

develop guidelines within the risk and control framework for the identification and exploitation of opportunities;

ensure that the risk and control framework is inclusive of operational legal implications; and

regularly review the relevant literature from appropriate sources applicable to compliance, legal and governance.

The Board considers legislation in the establishment of governance and risk structures and processes, with appropriate checks and balances that enable the Board to discharge its legal responsibilities based on the principles of effective leadership, sustainability, innovation, fairness, fair treatment of members, collaboration and social transformation.

The Board has subscribed to the Governance and Compliance Instrument (GCI Tool), which was developed by the Institute of Directors of Southern Africa and the Council, in collaboration with The Global Platform for Intellectual Property. The GCI Tool is a web based assurance framework that allows medical schemes to assess their level of compliance in respect of the requirements of the King Reports and general governance. Having already completed the Council Compliance Questionnaire and self-assessment against the 16 principles of King IV during 2018, the Board is satisfied that the governance of the Scheme is aligned with the principles of King IV and that it is overseeing the application of the relevant practices.


5.3 Remuneration Committee

The membership, authority and duties of the Remuneration Committee are governed by terms of reference set by the Board. The Remuneration Committee comprises:

Chairman: N Parker Trustee: M Govender Trustee: N Byrne Trustee: P Hemus Trustee: T Jackson Trustee: J Viljoen

The mandate of the Remuneration Committee is to:

review the on-going appropriateness and relevance of the remuneration policies and procedures;

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5.3 Remuneration Committee (continued)

The mandate of the Remuneration Committee is to: (continued)

oversee the implementation of the remuneration policy within the Scheme;

recommend the overall policy for remuneration packages of the Board and its committees;

recommend the overall policy for remuneration packages for all senior staff members directly employed by the Scheme, in a form and amount which will attract, retain, motivate and reward high calibre individuals;

determine and review the remuneration packages of the Board and senior staff members directly employed by the Scheme;

review policies for the retention and recruitment of senior staff directly employed by the Scheme, on professional and equivalent grades;

disclose any payments or considerations made to Trustees in the particular year at the Annual General Meeting;

review the performance of the Trustees and senior staff members directly employed by the Scheme, annually, to ensure that performance is linked to the priorities of the Scheme for the forthcoming year;

assist the Board in developing and implementing a systematic, open and proactive performance evaluation programme for the Board and senior staff;

recommend the annual remuneration for Trustees and the Chairman of the Board;

advise on the terms and conditions of contracts or renewal thereof of senior staff directly employed by the Scheme; and

evaluate the balance of skills, knowledge and experience of the Board and prepare a description of the roles and capabilities required by the Board.

The Board assumes significant responsibilities and fiduciary risks throughout the year and has independent professions to consider. It commits a sizeable amount of time to serve the needs of the Scheme and its members. It is therefore important that the Scheme remunerates its Trustees and Committee members adequately to ensure that persons with appropriate skills and knowledge are attracted and retained by the Scheme. Remuneration and considerations paid to Board members are disclosed in Note 11.1 to the financial statements.


5.4 Finance Committee

The membership, authority and duties of the Finance Committee are governed by terms of reference set by the Board. The Finance Committee comprises:

Chairperson: M Govender Trustee: T Jackson Trustee: J Cloete Trustee: D Tretheway

The Finance Committee is mandated to take steps on behalf of the Board as necessary in fulfilling its oversight responsibilities. The Committee is further mandated to receive and review the management accounts as prepared by the administrator of the Scheme and to ensure that all financial processes are carried out properly. The Committee may consider any other issues relevant to its mandate that it deems necessary.

The mandate of the Finance Committee is to:

analyse the monthly management accounts and report thereon to the Board;

report regularly to the Board on the activities of the Committee and identify and make recommendations to the Board on relevant financial issues;

prepare and monitor financial policies;

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5.4 Finance Committee (continued)

The mandate of the Finance Committee is to: (continued)

review and assess financial performance;

make recommendations to the Board on financial matters;

ensure compliance with all relevant legislation; and

perform any additional duties that may from time to time be delegated to the Committee by the Board.


5.5 Audit Committee

The membership, authority and duties of the Audit Committee are governed by terms of reference set by the Board. The Audit Committee comprises:

Independent Chairman: P Brink Independent: H Kajie Independent: B Phillips

Trustee: G Eloff Trustee: M Govender

The Committee consists of five members of whom the majority, including the chairman, are independent of the Scheme. Two Trustees are appointed as members of the Committee.

The Principal Officer of the Scheme, the financial manager of the administrator, the external auditor and internal auditor are invited to all Audit Committee meetings and have unrestricted access to the Chairman of the Committee. All other Trustees may attend the meetings in an observer capacity. The Audit Committee carries out the following functions in accordance with its terms of reference:

assists the Board in its evaluation of the adequacy and efficiency of the internal control systems, accounting practices, information systems and auditing processes applied by the Scheme or its administrator in the day to day management of its business;

facilitates and promotes communication and liaises regarding the matters referred to above or related matters between the Board, Principal Officer, administrator, external auditor and internal auditor of the Scheme;

satisfies itself with the independence of the administrator’s internal audit department, reviews the internal audit function, the internal audit plan and audit findings;

satisfies itself with the independence of the external auditor and reviews its audit plan, audit management letter, audit report and audit fees;

reviews the annual performance of the external auditor and makes recommendation to the Board for its further consideration and recommendation to the members at the Annual General Meeting;

satisfies itself with the financial statements in terms of the accounting policies and drafted on the going concern basis and recommends their acceptance to the Board;

oversees the Scheme’s governance processes and risk management and satisfies itself that the Scheme implements an effective policy and plan for risk management;

satisfies itself that the financial function of the Scheme and the administrator are appropriate, adequately resourced and effective;

advises the Board on matters referred to the Committee by them; and

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5.5 Audit Committee (continued)

The Audit Committee carries out the following functions in accordance with its terms of reference: (continued)

makes recommendations to the Board that arise from carrying out the above functions. The Board monitors the Committee’s performance against the related terms of reference. No deficiencies were noted relating to the 2019 financial year.

5.6 Marketing Committee

The membership, authority and duties of the Marketing Committee are governed by terms of reference set by the Board.

The Marketing Committee comprises: Chairman: J Cloete Trustee: M Govender Trustee: M Duly Trustee: A Fourie

Trustee: C Norton Trustee: J Viljoen Trustee: Dr M Mojapelo-Mokotedi

In terms of the mandate set out below, the committee will make recommendations to the Board on key issues impacting the direction of the Scheme from a commercial, sales channel, public relations and marketing perspective.

The mandate of the Marketing Committee is to:

review the marketing strategy in line with the overall strategy of the Scheme;

ensure that the marketing strategy is designed to meet the evolving needs of the Scheme and the macro environment it operates in;

review performance of the various sales channels to market and the consideration of strategic issues that will ensure optimisation of these sales channels;

consider strategic new sales channels that will contribute to membership growth;

review annually the marketing budget in line with the identified strategic marketing imperatives and activities as required;

review biannually the budget expenditure and activities;

review the implementation of the marketing strategy including creative execution and media placement in order to ensure alignment to the strategy;

review strategic market opportunities identified by the technical/marketing consultants in relation to core product, complimentary products and services;

review the Public Relations strategy of the Scheme annually in the light of the marketing strategy;

oversee any agreement that pertains to marketing; and

review the performance of the Marketing and Media agency to contract regularly.


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5.7 Managed Healthcare Committee

The Managed Healthcare Committee comprises: Chairman: Dr M Mojapelo-Mokotedi Trustee: M Duly Trustee: A Fourie Trustee: T Jackson

Trustee: C Norton Trustee: N Parker Trustee: D Tretheway

In terms of the mandate set out below, the committee will make recommendations to the Board on the development and implementation of a Clinical Governance Strategy for the Scheme. The mandate of the Managed Healthcare Committee is to:

develop, implement, assess and evaluate the execution of the Clinical Governance Strategy and principles of the Scheme;

review and amend clinical and funding guidelines for the Scheme;

participate in the option design to ensure that the clinical guidelines are comprehended;

identify best practices in attending to and resolving disputes;

participate in option design and provide input into the preparation of member literature to ensure that the rules of the Scheme are clear and unambiguous;

monitor the quality of healthcare delivered to members of the Scheme;

monitor the changing healthcare environment and proactively advise the Board on strategic implications for the Scheme; and

Identify and manage any areas of clinical risk. The Board monitors the Committee’s performance against the related terms of reference. No deficiencies were noted relating to the 2019 financial year.


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5 Scheme Committees (continued) 5.8 Board and committee meeting attendance The following schedule sets out attendance at Board and committee meetings. Related remuneration is disclosed in Note 11.1 to the financial statements.

Committee Meetings

Board

Meetings Finance

Committee Audit

Committee Investment Committee

Marketing Committee

Managed Care

Committee

Remune- ration

Committee Operations Committee

Risk and Legal

Committee Total Board and Committee Members A B A B A B A B A B A B A B A B A B A B

T Jackson (Chairman) 10 10 11 8 4 4 6 6 2 2 4 4 37 34

M Govender (Vice Chairman) 10 10 11 11 3 3 5 5 2 2 2 2 33 33

N Byrne (Appointed 1 August 2019) 4 4 1 1 1 0 6 5

J Cloete (Re-elected 25 July 2019) 10 8 11 7 5 5 7 4 33 24

M Duly 10 10 5 5 6 6 7 7 28 28

G Eloff (Re-elected 25 July 2019) 10 10 3 2 4 4 4 4 21 20

A Fourie (Appointed 1 August 2019) 4 4 2 2 3 0 9 6

P Hemus 10 9 4 4 2 2 16 15

Dr M Mojapelo-Mokotedi 10 10 2 0 6 6 18 16

C Norton 10 9 5 3 6 5 7 2 28 19

N Parker (Re-elected 25 July 2019) 10 9 6 6 2 2 4 3 22 20

D Tretheway (Appointed 1 August 2019) 4 3 4 3 1 1 3 3 2 1 2 2 16 13

J Viljoen (Appointed 1 August 2019) 4 3 2 1 1 1 2 1 9 6

Independent: P Brink 3 3 3 3

Independent: H Kajie 3 2 3 2

Independent: B Phillips 3 3 3 3

A: Total meetings convened that could be attended B: Actual number of meetings attended


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6 Scheme Activities at the end of the accounting year

6.1 Operational statistics

Maxima

Plus Maxima

Exec Maxima

Exec Grid FlexiFed

1 FlexiFed 1 Elect

FlexiFed 2

FlexiFed 2 Grid

FlexiFed 2 Elect

FlexiFed 3

FlexiFed 3 Grid

FlexiFed 3 Elect Subtotal

2019

Number of members (n) 1 484 4 146 193 21 400 1 123 5 288 4 711 189 14 962 1 636 140 55 272

Number of beneficiaries (n) 2 241 7 069 309 44 534 2 228 11 588 10 285 471 29 428 3 382 309 111 844

Number of dependants (n) 757 2 923 116 23 134 1 105 6 300 5 574 282 14 466 1 746 169 56 572

Average number of members (n) 1 342 3 791 171 19 055 884 5 145 3 546 169 13 320 1 543 133 49 099

Average number of beneficiaries (n) 2 050 6 522 268 40 042 1 795 11 310 7 935 427 26 002 3 178 290 99 819

Dependant ratio to members (n) 0.51 0.71 0.60 1.08 0.98 1.19 1.18 1.49 0.97 1.07 1.21 1.02

Risk contribution pan of beneficiaries pm (R) 7 109 3 979 3 676 1 130 853 1 476 1 359 1 079 1 874 1 643 1 342 2 320

Average age of beneficiaries (yrs) 64.4 58.2 29.2 30.4 29.2 32.3 39.0 32.4 44.7 42.8 41.0 40.3

Pensioner ratio (%) 68.7% 58.3% 57.5% 6.7% 4.5% 12.0% 24.9% 7.4% 32.2% 31.1% 25.7% 29.9%

Average managed care pan of members pm (R) 119 116 114 103 102 105 105 104 106 106 106

Average managed care pan of beneficiaries pm (R) 78 67 73 49 50 48 47 41 54 51 49

Net claims as a percentage of net contributions (%) 106.7% 98.7% 181.6% 72.3% 60.3% 92.9% 82.5% 77.2% 89.8% 101.4% 94.5%

Relevant healthcare expenditure pan of beneficiaries pm (R) 7 171 3 699 6 409 798 477 1 406 942 872 1 558 1 670 1 563

Relevant healthcare expenditure as a percentage of gross contributions - Claims ratio (%)

104.2% 86.6% 172.9% 77.4% 68.3% 96.5% 88.8% 88.0% 93.1% 107.0% 122.8%

Non-healthcare expenditure pan of beneficiaries pm (R) 318 284 309 231 229 225 222 193 251 238 223

Non-healthcare expenditure as a percentage of gross contributions (%)

4.2% 6.1% 7.2% 20.1% 26.4% 15.1% 16.1% 17.7% 13.3% 14.3% 16.4%

Average chronic profile (%) 59.0% 52.8% 57.0% 8.7% 7.5% 13.2% 17.3% 12.5% 23.5% 26.4% 22.0%

*pan - per average number ** pm - per month


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6 Scheme Activities at the end of the accounting year (continued)

6.1 Operational statistics (continued)

Subtotal Brought Forward

FlexiFed 4

FlexiFed 4 Grid

FlexiFed 4 Elect MyFed Grand Total

2019

Number of members (n) 55 272 18 967 837 500 4 239 79 815

Number of beneficiaries (n) 111 844 36 057 1 796 1 044 6 163 156 904

Number of dependants (n) 56 572 17 090 959 544 1 924 77 089

Average number of members (n) 49 099 19 503 829 524 4 660 74 615

Average number of beneficiaries (n) 99 819 37 487 1 800 1 101 6 755 146 961

Dependant ratio to members (n) 1.02 0.90 1.15 1.09 0.45 0.97

Risk contribution pan of beneficiaries pm (R) 2 320 2 412 2 101 1 760 1 048 1 863

Average age of beneficiaries (yrs) 47.1 46.5 43.1 36.4 43.3

Pensioner ratio (%) 34.0% 37.3% 29.2% 15.9% 29.1%

Average managed care pan of members pm (R) 110 109 106 59 96.0

Average managed care pan of beneficiaries pm (R) 57 50 50 41 46.0

Net claims as a percentage of net contributions (%) 89.1% 89.1% 130.1% 84.7% 86.0

Relevant healthcare expenditure pan of beneficiaries pm (R) 2 346 2 009 1 702 1 035 1 308

Relevant healthcare expenditure as a percentage of gross contributions - Claims ratio (%) 92.8% 94.6% 91.0% 90.1% 81.0

Non-healthcare expenditure pan of beneficiaries pm (R) 261 243 225 175 233.0

Non-healthcare expenditure as a percentage of gross contributions (%) 10.7% 13.7% 10.6% 16.7% 14.5

Average chronic profile (%) 34.7% 40.2% 31.4% 14.0% 20.4



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Ultimax Maxima

Plus Maxima

Exec Maxima Standard

Maxima Advance

Maxima Standard

Elect Maxima

Basis Maxima

Core Maxima

Saver

Maxima Entry Saver

Maxima Entry Zone

Blue Door Plus Subtotal

2018

Number of members (n) 168 1 180 3 992 20 661 2 265 583 5 963 6 984 5 219 13 965 4 300 4 487 69 767

Number of beneficiaries (n) 246 1 841 7 035 41 447 3 852 1 239 11 692 13 421 11 487 30 405 8 333 6 911 137 909

Number of dependants (n) 78 661 3 043 20 786 1 587 656 5 729 6 437 6 268 16 440 4 033 2 424 68 142

Average number of members (n) 176 1 228 4 108 21 340 2 329 596 6 167 7 252 5 214 13 038 4 185 4 312 69 945

Average number of beneficiaries (n) 259 1 932 7 267 42 995 3 999 1 265 12 080 1 932 11 451 28 355 8 004 6 510 126 049

Dependant ratio to members (n) 0.46 0.56 0.76 1.01 0.70 1.13 0.96 0.92 1.20 1.18 0.94 0.54 0.98

Risk contribution pan of beneficiaries pm (R) 8 753 6 352 3 814 2 105 2 878 1 544 1 798 1 769 1 368 1 011 1 127 956

Average age of beneficiaries (yrs) 66 62 55 42 61 36 39 47 31 28 35 32

Pensioner ratio (%) 64.6% 55.9% 41.0% 16.9% 51.9% 11.6% 13.6% 27.0% 6.2% 2.7% 8.4% 6.5%

Average managed care pan of members pm (R) 112 114 112 103 99 102 99 97 94 98 52 53

Average managed care pan of beneficiaries pm (R) 76 73 63 51 47 59 51 44 43 51 27 1

Net claims as a percentage of net contributions (%) 90.7% 96.9% 102.6% 87.2% 101.9% 54.0% 83.6% 86.9% 80.5% 71.7% 68.3% 88.3%

Relevant healthcare expenditure pan of beneficiaries pm (R)

7 899 6 136 3 927 1 858 876 2 937 1 505 1 143 738 1 572 761 872

Relevant healthcare expenditure as a percentage of gross contributions - Claims ratio (%)

84.4% 91.4% 96.1% 73.8% 93.8% 48.2% 73.5% 91.0% 73.3% 64.2% 71.4% 93.3%

Non-healthcare expenditure pan of beneficiaries pm (R)

321 307 270 246 224 276 248 222 221 249 161 162

Non-healthcare expenditure as a percentage of gross contributions (%)

3.5% 4.6% 6.6% 9.6% 11.9% 8.6% 11.8% 13.8% 18.4% 14.1% 14.3% 17.0%

Average chronic profile (%) 60.6% 54.3% 46.6% 29.0% 21.6% 39.1% 18.2% 11.3% 6.4% 19.1% 8.1% 7.3%



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Subtotal Brought Forward

Maxima Basis Grid

Maxima Saver Grid

Maxima Core Grid Grand Total

2018

Number of members (n) 69 767 517 2 138 386 72 808

Number of beneficiaries (n) 137 909 1 095 4 832 718 144 554

Number of dependants (n) 68 142 578 2 694 332 71 746

Average number of members (n) 69 945 485 1 474 381 72 285

Average number of beneficiaries (n) 126 049 1 044 3 307 712 131 112

Dependant ratio to members (n) 0.98 0.49 0.51 0.54 0.99

Average age of beneficiaries (yrs) 39 38 53 39

Pensioner ratio (%) 18.8% 14.5% 36.4% 15.4%

Risk contribution per average number of beneficiaries pm (R) 1 557 1 222 1 604 1 461

Average managed care per average number of members pm (R) 97 95 98 96

Average managed care per average number of beneficiaries pm (R) 45 42 52 46

Net claims as a percentage of net contributions (%) 86.3% 66.8% 105.3% 86.0%

Relevant healthcare expenditure pan of beneficiaries pm (R) 1 348 874 1 701 1 308

Relevant healthcare expenditure as a percentage of gross contributions - Claims ratio (%) 75.3% 65.6% 110.8% 81.0%

Non-healthcare expenditure pan of beneficiaries pm (R) 224 219 256 233

Non-healthcare expenditure as a percentage of gross contributions (%) 12.3% 15.3% 16.0% 14.5%

Average chronic profile (%) 24.8% 13.3% 29.5% 20.4%


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7 Review of the accounting year’s activities

7.1 Operational statistics

2019 2018

Accumulated funds per member at 31 December (R) 18 375 15 338

Amount paid to administrators (R'000)

- Medscheme administration fees 261 870 242 825

- PHA administration fees (winddown fees) 8 621 -

- Medscheme managed care programme 79 788 72 824

- PHA managed care programme (winddown fees) 2 788 -

Broker service fees (R'000) 66 509 61 924

Number of principal members joining the Scheme (n) (2019: including 15 808 members from Topmed on amalgamation) 28 479 16 794

Number of principal members leaving the Scheme (n) 21 470 15 966

Return on investments as a percentage of investments (%) * 10.60 5.40 *The returns on investments are calculated monthly and compounded to formulate an annual return.

7.2 Results of operations

The results of the Scheme are set out in the financial statements and the Board believes that no further clarification is required.

2019 2018

R'000 R'000

Members’ funds per statement of financial position 1 487 135 1 125 955

Less:

Available-for-sale revaluation reserve (20 567) (9 192)

(Cumulative net unrealised gains on re-measurement to fair value of

financial instruments included in members’ funds) Accumulated funds per Regulation 29 1 466 568 1 116 763 Gross contributions 3 376 529 3 554 438

Accumulated funds ratio (%) 43.43 31.42

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7 Review of the accounting year’s activities (continued)

7.3 Revaluation reserve

Movements in the revaluation reserve are set out in the statement of change in funds and reserve on page 38 of the financial statements. There have been no unusual movements that the Board believes should be brought to the attention of the members of the Scheme.

7.4 Outstanding risk claims provision

The basis of calculation and movements on the outstanding risk claims provision are set out in Note 5 to the financial statements and are consistent with the previous year. There have been no unusual movements that the Board believes should be brought to the attention of the members of the Scheme.

7.5 Deferral of the implementation of IFRS 9 Financial Instruments

IFRS 9 Financial Instruments is effective for annual periods beginning on or after 1 January 2018.

IFRS 4 Insurance Contracts provides a temporary exemption that permits, but does not require, the Scheme to apply IAS 39 rather than IFRS 9 for annual periods beginning before 1 January 2021, the effective date of the new IFRS 17 Insurance Contracts. A scheme may apply the temporary exemption from IFRS 9 if, and only if:

it has not previously applied any version of IFRS 9

activities are predominantly connected with insurance, at its reporting date.

The Scheme meets both the criteria and has elected to apply the exemption to defer the application of IFRS 9 to 1 January 2021.

8 Actuarial services

The Scheme actuaries, employed by Medscheme Holdings (Pty) Ltd, during the year were:

A Brownlee, FFA FASSA, January 2019 – April 2019 L Mulaudzi, FASSA, May 2019 – 9 September 2019 and C Manikai, FASSA, 9 September 2019 – December 2019.

They were consulted in the determination of the contribution and benefit levels for 2019 as well as the outstanding risk claims provision calculation at year-end.

9 Investments in and loans to participating employers of the members or other related parties of the Scheme

The Scheme has investments through portfolios managed by the underlying investment managers in Sanlam, who employs members of the Scheme. The Council has granted the Scheme an exemption in terms of Section 35(8) of the Act. The Scheme holds no other direct investments in, nor has it made loans to, participating employers of the members, or other related parties of the Scheme.

10 Fidelity Insurance

The Scheme has taken out insurance cover as required by the Act, to protect the Scheme against fidelity losses and the Trustees and independent committee members against any professional indemnity claims.

11 Related party transactions

Full details of remuneration and related party transactions are disclosed in Note 11.1 and Note 18 respectively to the financial statements.

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12 Internal audit

A formal internal audit function exists, with regular reporting to the Audit Committee. A structured internal audit plan is provided to the Audit Committee for input and suggestions during the course of the year. This audit plan is also reviewed by the external auditor for reliance on their audit work.

The Scheme receives scheme specific internal audit reports performed by AfroCentric Health Ltd Internal Audit department which are reviewed to ensure sound and accurate administration.

13 Events after the reporting date

The Scheme is aware of the following events after the reporting date: COVID-19 On 31 December 2019, the World Health Organisation (WHO) China Country Office was informed of cases due to an unknown cause detected in Wuhan City, Hubei Province of China, which was later identified on 7 January 2020 as a novel coronavirus (COVID-19). The first South African case was confirmed on 5 March 2020. The patient was part of a group of 10 people who arrived back from Italy on 1 March 2020 and since then further cases have been confirmed. WHO recently declared COVID-19 a worldwide pandemic.

Fedhealth is on the alert for any emerging risks of this pandemic and will constantly review and align its internal processes and procedures to ensure that Fedhealth members are supported to receive the care they need. The Scheme is in close communication with our network facilities and practitioners and all role-players know how to deal with the various scenarios, in line with the Department of Health guidelines. There are designated hospitals in both the public and private sector where Fedhealth patients can be admitted in line with clearly defined protocols in the event of being faced with identified or potential cases. The Scheme is in further negotiations with pathology and radiology laboratories to ensure that standard operating procedures are clearly defined and that the best rates are negotiated.

The administrator has a task team that is tracking events as they happen and updating operations. Fedhealth can confirm that a positive diagnosis of COVID-19 is a notifiable condition, and that that the Scheme will cover costs for supportive treatment and hospitalisation as Prescribed Minimum Benefits (PMBs), subject to scheme rules (formularies etc.) per option. Stock Market Crash Global Stock Markets crashed on 9 March 2020. The markets having fallen further substantially since then. Notable contributing factors include the COVID–19 pandemic and the Russia-Saudi Arabia oil price war. The Scheme will engage with the Investment Portfolio managers to monitor the effects of this on the Scheme’s investments.

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14 Business strategy

2019 was a very challenging year for the Scheme from a claims point of view. Despite a number of interventions to ensure that unnecessary expenditure was avoided, the Scheme experienced significant increases in claims costs. The underlying causes of such increases are difficult to determine but the impact is easy to ascertain. Hospital costs increased by 17% year on year, and while usually it is the utilisation of the number of members being hospitalised that drives increases, this year saw the cost of admission spike.

Claims costs can vary from year to year, similar to the el Nino effect on weather, and often, like the weather, there is little one can do about it. But there is a noticeable trend that when the political or economic outlook is gloomy there is an adverse impact on claims. In 2019 there was plenty to feel concerned about: doctors were concerned what National Health Insurance (NHI) would mean for their practices; members in vulnerable employment positions may have considered having procedures in anticipation of being retrenched and consequently without medical aid cover; everyone in the country is stressed and that in itself can have an adverse health impact. On the other hand, like the weather, it may just be cyclical.

Whatever the cause, the impact on the Scheme’s results is clear and disconcerting. And for that reason, steps need to be taken to ensure the future sustainability of the Scheme. These steps are never welcome, as they often create a conflict between what treatment a physician would ideally like to provide, and what treatment a fund can sustain. The raison d’etre of a medical scheme is to help members defray medical expenses. It does not mean that all and every expense is covered, regardless of the efficacy and outcome of the medical intervention. Medical schemes apply the elements of social solidarity rather than profit making, something many members perhaps don’t realise, which means that while the Scheme strives to assist members in their darkest hours, it simply cannot fund everything.

The current pressing issues facing the Scheme are:

Value For healthy members who join a scheme it is difficult to establish value other to ensure against unforeseen health events. While members who have expensive health conditions may, begrudgingly, appreciate the value of their contributions, younger and healthier members struggle to see why they should continue to pay what is almost the amount of their bond or car repayment on a product that they never use. The whole concept of medical aids is that the young, healthy and wealthy subsidise the older, sicker and poorer. These are subjective standards as it doesn’t necessarily follow that all old people are sicker, and younger people are at risk of contracting non-communicable conditions such as diabetes, but the important factor is that if healthier people opt out of medical aid membership it increases the burden on us all. It is vital for us to find means to add to the value of belonging to a medical aid even when healthy, which is why Fedhealth is transforming from a curative hospital care funder to a broader-based wellness and lifestyle organisation.

Innovation In 2019 several options were renamed as part of the FlexiFed range which included the revolutionary MediVault and Wallet concepts. The thinking behind this was to free members from having to contribute a fixed amount to savings and allow them some latitude to determine what they personally and specifically needed for their day-to-day benefits. The Scheme also

broadened the application of what are known in the industry as EDOs, Efficiency Discount Options, through the ELECT and GRID

options. EDOs are essentially the same benefit structures per option but by availing oneself of a network hospital provider substantial discounts can be achieved.

While great effort was taken to promote the new structures within the Fedhealth membership base, using a number of different media platforms and mechanisms, many members did not familiarise themselves with the operation of the new benefits, particularly the activation of the MediVault. This led to congestion on the call-centre as members tried to understand the new processes. However during the course of the year members, brokers and healthcare providers became more familiar with the product, resulting in a stabilisation of the service levels.

Many people are still trying to fully understand how the benefit design works, and we are applying the lessons learnt in communicating with members and providers and simplifying some of the processes that are needed to effect the product. We are confident that the product meets a need in our members’ lives by giving them greater flexibility of cover and cost and that the innovation will be well received.

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14 Business strategy

Amalgamation During 2019 Fedhealth and Topmed amalgamated, a process that is never easy for members, providers and administrators. As the amalgamation took place officially on 1 August 2019 there were a number of challenges faced with members’ benefits; a Topmed member who had already used their entire medical savings benefit would be faced with a debt of the five months contribution still due towards the utilised amount, while differences in formularies, for instance, meant that some members had to adapt their medication. Both Fedhealth and Topmed management took steps to reduce the disruption but it was inevitable that there would be some unhappiness.

We welcome the Topmed members to the Fedhealth house and hope that they become familiar with the Fedhealth style, with four of the ex-Topmed trustees now serving on the Fedhealth Board. The circumstances leading up to the amalgamation of the two schemes were specific and the Board is not actively contemplating other amalgamation opportunities at this stage.

As a result of the amalgamation Fedhealth’s membership increased to 79 815. A natural consequence of any amalgamation is a drop off of membership immediately post the amalgamation, usually due to members’ unhappiness at the new structures being imposed on them, but we are confident that the majority of members have settled down into the new structure. The average beneficiary age of the Scheme increased slightly from 39 to 43 mainly as a result of the amalgamation but significant reserves of R435 million were transferred into the Scheme. As a result the reserve ratio of the Scheme increased to 43.8%, which is a comfortable buffer from the required reserve ratio of 25%. Having higher reserves does not unfortunately allow the Scheme to reduce contribution rates, as it has to maintain annual surpluses – however the comfortable reserve margin does mean that less of the contribution rate increase is allocated toward reserve building and maintenance.

Fraud, Waste and Abuse It turns out that while most providers are concentrating on practicing good medicine, there are a number of providers and members who are trying to make additional income from nefarious activities. Fedhealth has employed forensic services which analyse the data on an empirical basis and which highlight anomalies. These anomalies are then investigated and where medical practices are unable to substantiate some of their claims against the Scheme further investigation takes place. By far, most practices are honest; some practice managers mistakenly use incorrect claiming codes which give rise to discussions on the correct codes, while there is a very small percentage of practices involved in out and out fraud. However it is these practices that are effectively stealing funds from the rest of the membership – your money – and steps must be taken to prevent and curtail it.

Fedhealth is committed to working with all providers to root out fake or unnecessary claims while at the same time minimising disruption to our members. We would be grateful if our members would understand that if we do investigate claims it’s not to avoid payment but to ensure that what the Scheme is paying for is reasonable and necessary. We would also appreciate members bringing to our attention claims that seem dubious or unreasonable so that they can be investigated. Many of the cases that we investigate arise from “whistle blower” tip offs, and it is only with the active involvement of our membership that we can reduce the fraud and abuse of benefits that takes place in the Scheme.

NHI and HMI The debate about the necessity and effectiveness of NHI continues, and while Fedhealth is fully behind the drive to provide UHC (Universal Health Coverage) we motivate that the current NHI dispensation creates more questions than solutions. There is so much uncertainty as to what could be covered that schemes have difficulty preparing for whatever iteration of NHI may present itself. Fedhealth management is constantly monitoring developments in this regard.

The HMI (Health Market Inquiry by the Competition Commission) raised a number of suggestions and opportunities for the private sector to improve efficiency and ultimately cost. If the industry were able to organise itself in the manner suggested by the HMI findings it would indeed be beneficial to all stakeholders. However, that process will involve several law changes, not to mention a change in mind-set, all of which points to years before we see any progress in this regard. Fedhealth has already started engaging with different provider groups to initiate a process to implement some of the findings.

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14 Business strategy (continued)

Partnerships The Scheme’s relationship with Sanlam continues to make progress, particularly in the area of adding value to members. A number of exciting developments are being explored that will help members manage their financial health as well as their physical health, and will be announced over the course of the year. The Sanlam partnership adds status to our position in the healthcare environment and increases the opportunities to develop scheme membership and product offering. The alignment of the branding of Fedhealth with Sanlam increases the reach of Fedhealth particularly in the large and well mobilised Sanlam agency force.

Digital strategy The Scheme will continue with development of digital solutions for communicating with members and allowing members to manage aspects of their relationship with the Scheme. The Fedhealth Family Room, introduced in 2017, has been further enhanced and ongoing development will see more functionality added, particularly allowing members to self-help rather than having to make use of the call centre. In terms of attracting new members, especially those of the desired age profile, the digital marketing strategy has been very successful, generating a large number of leads. The successes in this space will be built on and the personalisation of the marketing strategy will enable the Scheme to talk to the desired target audience in a manner that appeals directly to them.


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15 Non-compliance matters

Nature and cause of non-compliance Possible impact of the non-compliance Corrective course 15.1 Contributions not received within the time stipulated by the Act

Section 26(7) of the Act states that: “All subscriptions or contributions shall be paid directly to a medical scheme not later than three days after payment thereof becoming due." Exceptions were found and credit control procedures were applied.

Late payment may result in a loss of interest on these amounts to the Scheme for the number of days that payment is late. This is not significant due to the short duration of the contributions outstanding. Members and employer groups are continuously instructed to submit payment on time.

The Board addresses the issue on an ongoing basis in accordance with the Scheme’s credit control policy.

15.2 Claim payments in excess of 30 days

Section 59(2) of the Act states that: "A medical scheme shall, in the case where an account has been rendered, subject to the provisions of this Act and the rules of the medical scheme concerned, pay to a member or a supplier of service, any benefit owing to that member or supplier of service within 30 days after the day on which the claim in respect of such benefit was received by the medical scheme."

Exceptions were found at the beginning of the financial year when claims are put on hold, to ensure that the approved tariff and benefit limits are loaded correctly on the administration platform. This process results in a delay in the processing of payments due to the backlog in claims, but only for a few days.

The delay only occurs at the beginning of the financial year when new tariffs and benefit limits are loaded; claims are paid within the first week of tariff and benefit limit approval.

The Scheme is not compliant with the Act and/or its rules when certain valid claims are rejected or amounts due on valid claims are short paid.

The year-end process is not considered to be significant due to the members and providers conforming to the annual practice. The practice ensures accurate claims processing for the new benefit year and is in the interest of the risk management process for the Scheme.

15.3 Loss making options

Section 33(2) of the Act states that: "The Registrar shall not approve any benefit option under this section unless the Council is satisfied that such benefit options (b) shall be self-supporting in terms of membership and financial performance and (c) is financially sound." Various options made net healthcare deficits as disclosed in Note 16 to the financial statements.

The Council may withdraw benefit options, directly affecting the members on these options.

The Scheme was specifically costed to incur net healthcare deficits on certain options. The Scheme’s actuary has taken this into account in costing the benefits for the 2020 financial year.

KPMG Inc

KPMG Crescent 85 Empire Road, Parktown, 2193, Private Bag 9, Parkview, 2122, South Africa Telephone +27 (0)11 647 7111 Fax +27 (0)11 647 8000 Docex 472 Johannesburg Web http://www.kpmg.co.za

32 KPMG Incorporated is a company incorporated under the South African Companies Act and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG Incorporated is a Registered Auditor, in public practice, in terms of the Auditing Profession Act 26 of 2005.Registration number 1999/021543/21

Chairman: Prof W Nkuhlu Chief Executive: I Sehoole Directors: Full list on website The company's principal place of business is at KPMG Crescent, 85 Empire Road, Parktown.

Independent Auditor’s Report To the Members of Fedhealth Medical Scheme Report on the Financial Statements Opinion We have audited the financial statements of Fedhealth Medical Scheme (“the Scheme”) set out on pages 36 to 100, which comprise the statement of financial position as at 31 December 2019, and the statement of comprehensive income, the statement of changes in funds and reserve and the statement of cash flows for the year then ended, and notes to the financial statements including a summary of significant accounting policies. In our opinion, these financial statements present fairly, in all material respects, the financial position of Fedhealth Medical Scheme as at 31 December 2019, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Medical Schemes Act of South Africa. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Scheme in accordance with the sections 290 and 291 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (Revised January 2018), parts 1 and 3 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (Revised November 2018) (together the IRBA Codes) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities, as applicable, in accordance with the IRBA Codes and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Codes are consistent with the corresponding sections of the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants and the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) respectively. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

33

Risk Claims Incurred Refer to Notes 1.9 and 9 to the financial statements. The key audit matter How the matter was addressed in our audit The most significant expense for the Scheme relates to risk claims incurred. Risk claims incurred is a key driver in determining the sustainability of the Scheme. Due to the significant volume of claims processed by the Scheme, the payment of valid risk claims is dependent on the integrity of the Scheme’s administration system, as well as the automated claim assessment controls. Risk claims incurred was considered a key audit matter due to the significant volume of claims processed during the year and the work effort required to be performed by the audit team.

Our audit procedures included the following: • We evaluated the accuracy of benefit limits

and rules captured onto the administration system by comparing the approved benefit limits and rules of the Scheme, to those captured onto the administration system.

• We tested the IT controls in place to prevent unauthorised access to or changes to the administration system.

• We tested, through the assistance of our own IT specialists, the automated claim assessment controls of the administration system to ensure that only valid claims were being processed and paid.

• We inspected the reconciliation, performed by the Scheme administrator, between the administration system and the general ledger to assess whether the risk claims paid were accurately captured into the Scheme’s accounting system.

Outstanding Risk Claims Provision Refer to Notes 1.4 and 5 to the financial statements. The key audit matter How the matter was addressed in our audit The outstanding risk claims provision (the provision) is the Scheme's estimate of the ultimate cost of settling all risk claims incurred but not yet reported (IBNR) at the reporting date. The provision is determined by the Scheme’s actuary as described in note 5 and is estimated using a range of statistical methods. Determining the provision requires judgement with regard to the assumptions applied in respect of measuring the outstanding risk claims provision which could materially affect the financial statements. Outstanding risk claims provision was considered a key audit matter due to the significant estimation involved in determining the provision.

Our audit procedures performed included the following: • We used our own actuarial specialists and:

o evaluated the appropriateness of the methodology used in determining the provision against best practice.

o challenged the appropriateness of the assumptions used in the Scheme’s methodology for measuring the provision by evaluating the assumptions against best practice and the current economic environment.

o evaluated the qualification, competence, independence and integrity of the Scheme’s actuary.

• We calculated our own estimation of the provision to confirm the reasonability of the Scheme’s provision.

• We assessed the adequacy of the provision by comparing actual claims paid after year-end that related to the current year to the provision at year-end.

• We evaluated whether the disclosures in the financial statements were appropriate in

34

Outstanding Risk Claims Provision Refer to Notes 1.4 and 5 to the financial statements. The key audit matter How the matter was addressed in our audit

accordance with IAS 37, Provisions, contingent liabilities and contingent assets.

Other Information The Scheme’s trustees are responsible for the other information. The other information comprises the Report of the Board of Trustees, the Statement of Responsibility by the Board of Trustees and the Statement of Corporate Governance by the Board of Trustees. The other information does not include the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Scheme’s Trustees for the Financial Statements The Scheme’s trustees are responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards and the requirements of the Medical Schemes Act of South Africa, and for such internal control as the Scheme’s trustees determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Scheme’s trustees are responsible for assessing the Scheme’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Scheme’s trustees either intend to liquidate the Scheme or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to

fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Scheme’s internal control.

35

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Scheme’s trustees.

• Conclude on the appropriateness of the Scheme’s trustees’ use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Scheme’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Scheme to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with the Scheme’s trustees regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. From the matters communicated with the Scheme’s trustees, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal and Regulatory Requirements Non-compliance with the Medical Schemes Act of South Africa As required by the Council for Medical Schemes, we report that there are no material instances of non- compliance with the requirements of the Medical Schemes Act of South Africa, that have come to our attention during the course of our audit. Audit tenure As required by the Council for Medical Schemes’ Circular 38 of 2018, Audit Tenure, we report that KPMG Inc. has been the auditor of Fedhealth Medical Scheme for 17 years. The engagement partner, LW Grobler, has been responsible for Fedhealth Medical Scheme’s audit for 4 years. KPMG Inc. Per LW Grobler Chartered Accountant (SA) Registered Auditor Associate Director 26 March 2020

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STATEMENT OF FINANCIAL POSITION 2019 2018

Note R'000 R'000 Assets

Non-current assets 1 159 508 725 866

Available-for-sale investments 2 1 159 508 725 866

Current assets 799 349 808 210

Trade and other receivables 3 292 352 228 574

Cash and cash equivalents 4 506 997 579 636 - - Total assets 1 958 857 1 534 076 - -

Funds and liabilities

Members’ funds 1 487 135 1 125 955

Accumulated funds 1 466 568 1 116 763

Available-for-sale revaluation reserve 20 567 9 192

Current liabilities 471 722 408 121

Outstanding risk claims provision 5 209 237 161 183

PMSA liability* 6 195 428 214 155

Trade and other payables 7 67 057 32 783

Total funds and liabilities 1 958 857 1 534 076 * PMSA: Personal medical savings accounts 0

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STATEMENT OF COMPREHENSIVE INCOME 2019 2018

Note R'000 R'000 Risk contribution income 8 3 285 572 3 109 603 Relevant healthcare expenditure (3 066 403) (2 779 901)

Net claims incurred (3 066 813) (2 780 354)

Risk claims incurred 9 (3 075 229) (2 787 527)

Third party claim recoveries 8 416 7 173 Net income on risk transfer arrangement 10 410 453

Risk transfer arrangement premiums paid (975) (885)

Recoveries from risk transfer arrangement 1 385 1 338

Gross healthcare result 219 169 329 702 Broker service fees ##BSF (66 509) (61 924)

Administration expenditure 11 (361 013) (338 925)

Net impairment loss on healthcare receivables 12 (17 045) (12 329)

Net healthcare result (225 398) (83 476) Other income 155 134 127 283 Investment income 13 146 474 96 051

Sundry income 14 8 660 31 232 Other expenditure (14 806) (12 428)

Asset management fees 15 (7 747) (5 903)

Interest on PMSA liability ##IP (7 059) (6 525) - - Net (deficit)/surplus for the year (85 070) 31 379

Note R'000 R'000

Other comprehensive income

Net fair value adjustment on available-for-sale investments 2 49 046 (20 868) Reclassification adjustment of losses/(gains) on disposal of available-for-sale investments* 13 (37 671) 422

Total other comprehensive income for the year 11 375 (20 446) Total comprehensive income for the year (73 695) 10 933 * The reclassification adjustment of losses/(gains) on disposal of the available-for-sale investments relates to the sale of investments during the year, which losses/(gains) are taken to the Statement of Comprehensive Income within "Investment income".

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STATEMENT OF CHANGE IN FUNDS AND RESERVE Available

for-sale- Accumulated Members’

revaluation funds funds

reserve

R'000 R'000 R’000 Balance as at 1 January 2018 29 638 1 085 384 1 115 022 Total comprehensive income for the year

Net surplus for the year - 31 379 31 379


Fair value reserve available-for-sale financial assets

Net unrealised gains for the year (Note 2) (20 868) - (20 868)

Fair value realised on disposal (Note 13) 422 - 422

Total other comprehensive income (20 446) - (20 446) Total comprehensive income for the year (20 446) 31 379 10 933 Balance as at 31 December 2018 9 192 1 116 763 1 125 955

Balance as at 1 January 2019 9 192 1 116 763 1 125 955 Total comprehensive income for the year

Net deficit for the year - (85 070) (85 070)

Transfer of reserves from other medical schemes (Note 21) - 434 875 434 875


Fair value reserve available-for-sale financial assets

Net unrealised losses for the year (Note 2) 49 046 - 49 046

Fair value realised on disposal (Note 13) (37 671) - (37 671) Total other comprehensive income 11 375 - 11 375

Total comprehensive income for the year 11 375 349 805 361 180 Balance as at 31 December 2019 20 567 1 466 568 1 487 135

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STATEMENT OF CASH FLOWS 2019 2018

Note R'000 R'000

Cash flow from operating activities

Cash flows utilised in operations before working capital changes 17 (213 572) (51 903) Working capital changes

Increase in trade and other receivables (42 029) (178 606)

Decrease in trade and other payables (5 417) (1 411)

Increase in outstanding risk claims provision 16 736 16 254

Decrease in PMSA liability (81 938) (2 374)

Cash utilised in operations (326 220) (218 040)

Interest paid on PMSA liability 6 (7 059) (6 525)

Net cash outflow from operating activities (333 279) (224 565) Cash flows from investing activities

Additions to available-for-sale investments 2 ( 678 799) (793 161)

Available-for-sale investment management fees 2 6 876 5 098

Proceeds on disposal of available-for-sale investments 2 791 138 632 651

Interest received 13 79 836 84 160

Dividends received 13 28 967 12 313

Net cash inflow/(outflow) from investing activities 228 018 (58 939) Net decrease in cash and cash equivalents (105 261) (283 504)

Cash and cash equivalents due to amalgamation 21 32 622 -

Cash and cash equivalents at the beginning of the year 579 636 863 140

Cash and cash equivalents at the end of the year 4 506 997 579 636

NOTES TO THE FINANCIALS STATEMENTS

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1 Significant accounting policies

The following are the significant accounting policies applied by the Scheme, which are consistent with those of the previous year, except for the adoption of the standards, amendments and interpretations in Note 1.1.1.

1.1 Basis of preparation

The financial statements have been prepared in accordance with the manner required by the Medical Schemes Act no. 131 of 1998, as amended (the Act) and with International Financial Reporting Standards (IFRS). The financial statements are prepared on the going concern principle and using the historical cost basis, except as otherwise stated below in Note 1.2. The financial statement information is presented in South African Rand (Rand), which also represents the Scheme’s functional currency. All financial information presented in Rand has been rounded to the nearest thousand except where otherwise indicated.

The preparation of the financial statements, in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Scheme’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 20 to the financial statements.

1.1.1 There were no new standards, amendments and interpretations effective in the 2019 financial year and relevant to the Scheme.

1.1.2 New standards, amendments and interpretations not yet effective and relevant to the Scheme:

The Financial Statements were approved on the 26 March 2020.

Standard Summary of requirements

IFRS 9 Financial Instruments

On 24 July 2014, the International Accounting Standards Board (IASB) issued the final IFRS 9 Financial Instruments Standard, which replaces earlier versions of IFRS 9 and completes the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement.

This standard will have an impact on the Scheme, which will include changes in the measurement bases of financial assets at amortised cost, fair value through other comprehensive income or fair value through profit or loss. Even though these measurement categories are similar to IAS 39, the criteria for classification into these categories are significantly different. In addition, the IFRS 9 impairment model has been changed from an “incurred loss” model from IAS 39 to an “expected credit loss” model, which is expected to increase the provision for bad debts recognised in the Scheme. The standard is effective for annual periods beginning on or after 1 January 2018 with retrospective application, early adoption is permitted.

However, IFRS 4 provides a temporary exemption that permits, but does not require, the Scheme to apply IAS 39 rather than IFRS 9 for annual periods beginning before 1 January 2021.

A scheme may apply the temporary exemption from IFRS 9 if, and only if:

it has not previously applied any version of IFRS 9

activities are predominantly connected with insurance, at its reporting date.

The Scheme meets both the criteria and has elected to apply the exemption to defer the application of IFRS 9 to 1 January 2021.

NOTES TO THE FINANCIAL STATEMENTS (continued)

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1 Significant accounting policies (continued)

1.1 Basis of preparation (continued)

1.1.2 New standards, amendments and interpretations not yet effective and relevant to the Scheme: (continued)


IFRS 17 Insurance Contracts

IFRS 17 supersedes IFRS 4 Insurance Contracts and aims to increase comparability and transparency regarding profitability. The new standard introduces a new comprehensive model (“general model”) for the recognition and measurement of liabilities arising from insurance contracts. In addition, it includes a simplified approach and modifications to the general measurement model that can be applied in certain circumstances and to specific contracts, such as:

Reinsurance contracts held;

Direct participating contracts; and

Investment contracts with discretionary participation features.

Under the new standard, investment components are excluded from insurance revenue and service expenses. Entities can also choose to present the effect of changes in discount rates and other financial risks in profit or loss or other comprehensive income.

The new standard includes various new disclosures and requires additional granularity in disclosures to assist users to assess the effects of insurance contracts on the Scheme’s financial statements.

The Scheme is in the process of determining the impact of IFRS 17 and will provide more detailed disclosure on the impact in future financial statements. The standard is effective for annual periods beginning on or after 1 January 2021. Early adoption is permitted.

Definition of Material (Amendments to IAS 1 and IAS 8)

The IASB refined its definition of material to make it easier to understand. It is now aligned across IFRS Standards and the Conceptual Framework.

The changes in the Definition of Material (Amendments to IAS 1 and IAS 8) all relate to a revised definition of 'material' which is quoted below from the final amendments: “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”

The IASB has also removed the definition of material omissions or misstatements from IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The amendments are effective from 1 January 2020 but may be applied earlier. However, IASB does not expect significant changes since the refinements are not intended to alter the concept of materiality


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1.1 Basis of preparation (continued)

1.1.2 New standards, amendments and interpretations not yet effective and relevant to the Scheme: (continued)


Definition of a Business (Amendments to IFRS 3)

Defining a business is important because the financial reporting requirements for the acquisition of a business are different from the requirements for the purchase of a group of assets that does not constitute a business. The proposed amendments are intended to provide entities with clearer application guidance to help distinguish between a business and a group of assets when applying IFRS 3.

In October 2018 the IASB issued this amendment to make it easier for companies to decide whether activities and assets they acquire are a business or merely a group of assets. The amendments:

Confirm that a business must include inputs and a process, and clarified that: (i) the process must be substantive and (ii) the inputs and process must together significantly contribute to creating outputs.

Narrow the definitions of a business by focusing the definition of outputs on goods and services provided to customers and other income from ordinary activities, rather than on providing dividends or other economic benefits directly to investors or lowering costs; and

Add a test that makes it easier to conclude that a company has acquired a group of assets, rather than a business, if the value of the assets acquired is substantially all concentrated in a single asset or group of similar assets.

The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020 and to asset acquisitions that occur on or after the beginning of that period. Earlier application is permitted.


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1.2 Financial instruments

Financial assets and liabilities are recognised on the Scheme’s statement of financial position when it becomes a party to the contractual provisions of the instrument. The Scheme classifies its financial instruments into the following categories: available-for-sale financial assets, loans and receivables and other liabilities. The classification depends on the nature and the purpose of the financial instruments and is determined at the time of initial recognition.

Measurement

Financial instruments are initially measured at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these instruments are measured as set out below.

Available-for-sale investments

Investments intended to be held for an indefinite period of time, which may be sold in response to needs in liquidity or changes in market conditions, are classified as available-for-sale. These are included in non-current assets unless the Trustees have the express intention of holding the investment for less than 12 months from reporting date or unless they will need to be sold to raise operating capital, in which case they are included in current assets.

All purchases and sales of investments are recognised on the trade date, which is the date that the Scheme commits to purchase or sell the asset. Available-for-sale investments are subsequently measured at fair value. Unrealised gains and losses arising from changes in the fair value of the available-for-sale investments are recognised in other comprehensive income and included in the available-for-sale revaluation reserve in members’ funds. These are not taken to profit or loss. When securities categorised as available-for-sale are sold or impaired, the fair value adjustments previously accumulated in members’ funds, are recognised in profit or loss as net realised gains or losses on disposal or impairments of investments. The fair values of listed investments are based on current closing prices.

Loans and other receivables

The Scheme’s loans and other receivables comprise trade and other receivables and cash and cash equivalents.

Trade and other receivables

Trade and other receivables are subsequently measured at amortised cost, using the effective interest method less impairment. An appropriate impairment for estimated irrecoverable amounts is recognised in profit or loss when there is objective evidence that the asset is impaired. This impairment is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the effective interest rate computed at initial recognition.

Impairments are written off to profit or loss as follows:

An impairment account is used when the carrying amount of impaired assets is not reduced directly. The impairment loss is recognised in profit or loss.

In other instances, the carrying value of the asset is reduced where the amounts are proved to be irrecoverable.

Insurance receivables

Insurance receivables are carried at cost less accumulated impairment losses. Impairment losses on insurance receivables are recognised and determined in a similar manner to impairment on financial assets carried at amortised cost. Refer to Note 1.15.


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1.2 Financial instruments (continued)

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits. Cash and cash equivalents are carried at amortised cost.

Financial liabilities

Financial liabilities consist of trade and other payables.

Trade and other payables

Trade and other payables are subsequently measured at amortised cost using the effective interest method.

Insurance payables

Insurance payables are subsequently measured at amortised cost using the effective interest method.

Offsetting financial instruments

Where a legally enforceable right to offset exists for the recognised financial assets and financial liabilities and there is a current intention to settle the liability and realise the asset simultaneously, or to settle on a net basis, all related financial effects are offset.

Derecognition of financial assets and liabilities

The Scheme derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Scheme neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Scheme recognises its retained interest in the asset and an associated liability for amounts it may have to pay.

Where the risks and rewards of ownership of the financial asset are substantially retained, the financial asset continues to be recognised.

The Scheme derecognises a financial liability when the contractual obligation is discharged or expires.

1.3 Personal medical savings accounts (PMSA) liability

The PMSA liability is managed by the Scheme on behalf of its members. It represents PMSA contributions, which are a deposit component of the medical insurance contracts and accrued interest thereon, net of any PMSA claims paid on behalf of members in terms of the Scheme’s rules. The deposit component has been unbundled since the Scheme can measure the deposit component separately and its accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component. The insurance component is recognised as an insurance liability.

Member unused savings at year-end are retained in the members’ PMSA. In terms of the Act, balances standing to the credit of members are refundable only in terms of Regulation 10 of the Act.

Advances on PMSA contributions are funded from the Scheme’s funds, and the risk of impairment is carried by the Scheme.


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1.3 Personal medical savings accounts (PMSA) liability (continued)

The PMSA liability, i.e. deposit component, is recognised in accordance with IAS 39 Financial Instruments: Recognition and Measurement and is initially measured at fair value (i.e. the amount payable on demand) as it has a demand feature and subsequently is measured at amortised cost.

PMSA contributions are credited on the accrual basis and withdrawals on a cash basis, i.e. no provision is made for outstanding claims at year-end.

1.4 Provisions

Provisions are recognised when the Scheme has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the effect of discounting to present value is material, provisions are adjusted to reflect the time value of money. The expected future cash flows are discounted at a rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost.

Outstanding risk claims provision

The outstanding risk claims provision is a provision made for the estimated cost of healthcare benefits that have been incurred before the end of the accounting period but that have not been reported to the medical scheme by that date. Risk claims outstanding are determined as accurately as possible based on a number of factors, which include previous experience in claims patterns, claims settlement patterns, changes in the nature and number of members according to gender and age, trends in claims frequency, changes in the claims processing cycle, and variations in the nature and average cost incurred per claim.

Estimated payments from PMSA are deducted in calculating the outstanding risk claims provision. The Scheme does not discount its provision for outstanding risk claims, as the effect of the time value of money is not considered material.

1.5 Medical insurance contracts

Contracts under which the Scheme accepts significant medical insurance risk from another party (the member) by agreeing to compensate the member or other beneficiary if a specified uncertain future health event (the insured event) adversely affects the member or other beneficiary are classified as medical insurance contracts. The contracts issued compensate the Scheme’s members for healthcare expenses incurred.

1.6 Risk contribution income

Contributions on member insurance contracts are accounted for monthly when their collection in terms of the insurance contract is reasonably certain. Risk contributions represent gross contributions after deduction of PMSA contributions. The earned portion of risk contributions received is recognised as revenue. Risk contributions are earned from the date of attachment of risk, over the indemnity period on a straight-line basis. Risk contributions are shown before the deduction of broker fees and other similar costs.


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1.7 Reimbursements from the Road Accident Fund (the RAF)

The Scheme grants assistance to its members in defraying expenditure incurred in connection with the rendering of any relevant health service. Such expenditure may be in connection with a claim that is also made to the RAF, administered in terms of the Road Accident Fund Act No. 56 of 1996. If the members are reimbursed by the RAF, they are contractually obliged to cede that payment to the Scheme to the extent that they have already been compensated.

A reimbursement from the RAF is a possible asset that arises from claims submitted to the RAF and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Scheme. The contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the contingent asset and the related income are recognised in the financial statements in the period in which the virtual certainty occurs.

1.8 Relevant healthcare expenditure

Relevant healthcare expenditure consists of net risk claims incurred, net income or expense from risk transfer arrangements and accredited managed care services as per Circular 56 of 2015.

1.9 Risk claims incurred

Risk claims incurred comprise the total estimated cost of all claims arising (excluding claims paid out of PMSA) from healthcare events that have occurred in the year and for which the Scheme is responsible, whether or not reported by the end of the year.

Net risk claims incurred are risk claims paid and reported adjusted by the outstanding risk claims provision at the beginning and end of the accounting period (excluding claims paid out of PMSA and Wallet). Net risk claims incurred include recoveries from third parties such as the RAF. Circular 56 of 2015 issued by the Council for Medical Schemes on 9 September 2015 concluded that all accredited managed care services are included as part of relevant healthcare expenditure as they directly impact on the delivery of cost-effective and appropriate healthcare management services to beneficiaries of medical schemes.

1.10 Risk transfer arrangement

A risk transfer arrangement is a contractual agreement whereby a third party undertakes to indemnify the Scheme against all or part of the loss that the Scheme may incur as a result of carrying on the business of a medical scheme.

Risk transfer premiums/fees are recognised as an expense over the indemnity period on a straight-line basis. If applicable, a portion of risk transfer premiums/fees are treated as prepayments.

Risk transfer benefits are presented in the statement of comprehensive income and statement of financial position on a gross basis.

Only contracts that give rise to a significant transfer of insurance risk are accounted for as re-insurance contracts. Amounts recoverable under such contracts are recognised in the same year as the related claim.

Claims recoveries relating to risk transfer arrangement is calculated on the basis as defined in Note 10.


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1.10 Risk transfer arrangement (continued)

Assets relating to a risk transfer arrangement include balances due under the risk transfer arrangement for outstanding risk claims provisions and risk claims reported not yet paid. Amounts recoverable under a risk transfer arrangement is estimated in a manner consistent with the risk claims provision, risk claims reported not yet paid and settled risk claims associated with the risk transfer arrangement.

1.11 Managed care: management services

These expenses represent the amounts paid or payable to non-accredited third party administrators, related parties and other third parties for managing the utilisation, costs and quality of healthcare services to the Scheme. These fees are expensed as incurred and are reported in Note 9 of the administration expenditure as defined in Circular 56 of 2015.

1.12 Liabilities and related assets under liability adequacy test

At the reporting date liability adequacy tests are performed to ensure the adequacy of the member insurance contract liabilities. The liability for insurance contracts is tested for adequacy by discounting current estimates of all future contractual cash flows and comparing this amount to the carrying value of the liability net of any related assets. Where a shortfall is identified, an additional provision is made and the Scheme recognises the deficiency in profit or loss for the year.

1.13 Investment income

Investment income comprises dividends, interest on cash and cash equivalents, interest on fixed interest securities and realised gains or losses on available-for-sale investments.

Dividend income from investments is recognised when the right to receive payment is established.

Interest income is recognised on the effective interest method, taking account of the principal amount outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Scheme.

Realised gains or losses on disposal of available-for-sale investments are recognised in profit or loss as investment income.

1.14 Interest paid on PMSA

The interest paid on PMSA is recognised in profit or loss according to the effective interest method, net of related costs.

1.15 Impairment losses

Financial assets

The carrying amounts of the Scheme’s assets are reviewed at each reporting date to determine whether there is any indication of impairment. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of the asset. If any such indication exists, the asset’s recoverable amount is estimated.

The Scheme first assesses whether objective evidence of impairment exists for financial assets that are individually significant, such as service provider debtors. In the case of assets which are not individually significant, such as contribution debtors, financial assets are grouped on the basis of similar credit characteristics, such as asset type and past-due status. These characteristics are used in the estimation of future recoverable cash flows.


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1.15 Impairment losses (continued)

An impairment loss in respect of an available-for-sale investment is calculated by reference to its fair value. When a decline in the fair value of an available-for-sale investment has been recognised in other comprehensive income and accumulated in the available-for-sale revaluation reserve and there is objective evidence that the asset is impaired, the cumulative loss that had been accumulated in the available-for-sale revaluation reserve is reclassified to profit or loss even though the financial asset has not been derecognised. The amount of the cumulative loss that is reclassified to profit or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that investment previously recognised in profit or loss. Changes in cumulative impairment losses attributable to application of the effective interest method are reflected as a component of interest income.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an impairment account against loans and receivables. Interest on the impaired asset continues to be recognised.

Reversals of impairments

Impairment losses in respect of financial assets are reversed if the subsequent decrease in an impairment loss can be related objectively to an event occurring after an impairment loss was recognised or as a result of a change in the estimates used to determine the recoverable amount.

An impairment loss in respect of an investment in an equity instrument classified as available-for-sale is not reversed through profit or loss. The impairment loss is reversed, with the amount of the reversal recognised in other comprehensive income. If the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after an impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss.

An impairment reversal in respect of a receivable carried at amortised cost is recognised in profit or loss.

1.16 Amalgamation with other medical schemes by acquisition

The Scheme amalgamation is accounted for by applying the acquisition method.

The cost of an amalgamation is measured as the fair value of the assets transferred and liabilities incurred or assumed at the date of exchange.

When an entity is amalgamated into the Scheme, all identifiable assets, liabilities and members’ funds are accounted for at their fair values at the acquisition date. No consideration is paid for these transactions and they are recognised as from the transaction date.

The Scheme recognises the net assets from amalgamated schemes as a direct addition to reserves in its Statement of Change in Funds and Reserve.

Section 63(14) of the Act prescribes that relevant assets and liabilities of the party effecting the transfer shall vest in and become binding upon the party to which transfer is affected.

No goodwill is recognised on the amalgamation of other schemes by acquisition.


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1.17 Allocation of income and expenditure to benefit options

The following items of income and expenditure are directly incurred by the Scheme’s benefit options:

Risk contribution income;

Risk claims incurred;

Risk transfer arrangement fees;

Managed care: management services;

Administration fees;

Broker fees; and

Impairment and recoveries on receivables. The remaining items are apportioned based on the number of members on each option:

Other administration expenditure;

Investment income;

Winding-down costs;

Sundry income; and

Asset management fees.


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2019 2018

2 Available-for-sale investments R'000 R'000 Acquisition cost 716 674 561 683

Unrealised gain on revaluation 9 192 29 639

Fair value at the beginning of the year 725 866 591 322 Additions to investments Fedhealth 678 799 793 161

Additions from amalgamation 503 811 -

Investment management fees (Note ##AMF) (6 876) (5 098)

Disposal at fair value at date of sale (791 138) (632 651)

Net unrealised gains/(losses) for the year 49 046 (20 868) Fair value at the end of the year 1 159 508 725 866 The investments included above represent investments in: Unlisted debentures 10 231 16 488

Listed equities 589 957 258 136

Listed fixed interest bonds 462 754 396 552

Listed investment property funds 96 566 54 690 1 159 508 725 866

The fair values of the publicly traded financial instruments are based on listed closing prices as at the reporting date. A register of investments is available for inspection at the registered office of the Scheme. Information regarding the exposure to credit and market risks, and fair value measurement, is included in Note 23.


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2019 2018

3 Trade and other receivables R'000 R'000 Insurance receivables

Contributions receivable 200 135 218 275

Members co-payments receivable 13 383 13 540

Provider debts receivable 2 931 1 748

Financial receivables

Advances on PMSA (Note 6) 9 577 1 065 Loans and receivables

Aid for Aids 8 3

Amounts owing by the administrator - 2 265

Hospital Discount 19 805 -

Investment income receivable 551 5 553

Loans to members (other) 27 -

Loans to members (MediVault) 70 459 -

RAF recovery 130 -

Sundry debtors 34 - 317 040 242 449


Less: Impairment losses (24 688) (13 875)

Balance at the beginning of the year (13 875) (7 653)

Amounts utilised during the year 8 098 7 171

Net movement in impairment (Note 12) (18 911) (13 393)

Balance at the end of the year 292 352 228 574 Topmed insurance receivables at year end included in above totals

Contributions receivable 100 -

Members co-payments receivable 3 -

Provider debts receivable 25 -

Advances on PMSA 8 218 -

Less impairment for Advances on PMSA (5 588) - 2 757 -

The carrying amounts of financial receivables approximate their fair values due to the short-term maturities of these assets. The estimated future cash flow receipts have not been discounted as the effect would be immaterial. Loans to Members – MediVault (Debtor) transferred to Wallet (Creditor)

The FlexiFed options gives members access to an interest-free loan facility called the MediVault Benefit. The amount allocated can be used to pay for day-to-day medical expenses and is based on the member’s selected option and family composition. These funds are not pro-rated based on the member’s join date and can be accessed at any time during the year. To access these funds the member is required to accept the terms and conditions before transferring an amount, in full upfront, or in part as needed in their Wallet account. The member only has to pay back the money transferred from the MediVault to the Wallet account – interest free over a period of twelve (12) months. Day-to-day benefit claims are funded from available savings, thereafter the member’s Wallet account if activated, or self-funded. Refer to Note 21 for Topmed balances taken over.


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2019 2018

4 Cash and cash equivalents - Medical Scheme assets R'000 R'000

Call accounts 85 878 60 479

Current accounts 14 081 37 637

Fixed deposits - 80 000

Money market investments 407 038 401 520 Balance at the end of the year 506 997 579 636

The weighted average effective interest rate on cash and cash equivalents was 6.9% (2018: 6.9%). Call accounts have an average maturity of one day (2018: one day). The return on money market investments is benchmarked against the STeFi. Refer to page 91 for performance comparison.

The fair values of cash and cash equivalents approximate the carrying amount as these are short-term in nature.

2019 2018

5 Outstanding risk claims provision R'000 R'000 Not covered by risk transfer arrangements

Provision for outstanding risk claims - Incurred but not reported (IBNR) 209 237 161 183 Analysis of movement in outstanding risk claims

provision

Balance at beginning of the year 161 183 144 930

Payments in respect of the previous year (158 059) (167 126) Over/(under) provision in the previous year (Note 9) 3 124 (22 196)

Adjustment for the current year (Note 9) 206 113 183 379 Balance at the end of the year 209 237 161 183 Analysis of outstanding risk claims provision

Estimated gross claims 220 427 186 440

Less: Estimated recoveries from PMSA (11 190) (25 257) Balance at the end of the year 209 237 161 183


P a g e | 5 3

5 Outstanding risk claims provision (continued)

Process used to determine the assumptions

The provision is calculated as expected ultimate claims less the actual claims paid and accrued as at the year-end. For year-end purposes, the expected ultimate claims are estimated by considering the actual risk claims paid as at 20 March 2020 in respect of the 2019 financial year, and extrapolating these paid claims to 30 April 2020 (four months after the end of the financial year, corresponding to the maximum period of time, of four months, during which claims have to be notified to the Scheme as per the Scheme's rules). The percentage of the estimated total risk claims in respect of the 2019 financial year paid by 20 March 2020 was 82.6% (2018: 26 March 2019: 79.75%).

The cost of outstanding risk claims is estimated using a range of statistical methods. Such methods extrapolate the trends of paid and incurred claims, average cost per risk claims and ultimate risk claim numbers for each benefit year based upon observed trends of earlier years and expected risk claims ratios. Run-off triangles are used in situations where it takes time after the treatment date until the full extent of the risk claims to be paid is known. It is assumed that payments will be made in a similar pattern for each service month.

The actual method or blend of methods used varies by benefit year considered, categories of risk claims and observed historical risk claims trends. To the extent that these methods use historical risk claims trends information they assume that the historical risk claims trends pattern will occur again in the future. There are reasons why this may not be the case which, insofar as they can be identified, have been allowed for by modifying the methods. Such reasons include:

changes in processes that affect the pattern/recording of risk claims paid and incurred;

economic, legal, political and social trends (resulting in different than expected levels of inflation and/or minimum medical benefits to be provided);

changes in composition of membership and their dependants’ profiles; and

random fluctuations, including the impact of large losses.

Assumptions

The assumptions that have the greatest effect on the measurement of the outstanding risk claims provision are the previous years’ experience in claims processing patterns and the average risk claims paid in the run-off period each year based on historical trends. These are used for assessing the outstanding risk claims provision.

Changes in assumptions and sensitivities to changes in key variables

The Scheme believes that the liability for risk claims reported in the statement of financial position is adequate. However, it recognises that the process of estimation is based upon certain variables which could differ when the risk claims arise.

Where variables are considered to be immaterial, no impact has been assessed for insignificant changes to these variables. Particular variables may not be considered material at present. However, should the materiality level of an individual variable change, assessment of changes of that variable may be required in the future.


P a g e | 5 4

5 Outstanding risk claims provision (continued)

Changes in assumptions and sensitivities to changes in key variables (continued)

The table below outlines the sensitivity of the provision for outstanding risk claims to movement in the significant key variables and assumptions.

Increase in Change in liability

Change in liability

variable

% 2019 2018

R'000 R'000 - - Risk claims processing patterns 10 20 924 16 118 Effect on accumulated funds ratio and accumulated funds: - - Accumulated funds ratio % % Accumulated funds ratio as at 31 December 43.43 31.42 - - Movement due to 10% increase in claims processing pattern 0.62 0.45

Accumulated funds R'000 R'000 Accumulated funds as at 31 December 1 466 568 1 116 763 Movement due to 10% increase in claims processing pattern 20 924 16 118

Liability adequacy test

The test is required to ensure that the measurement of the Scheme’s insurance liabilities considers all contractual cash flows, using current estimates.

The Scheme has no deferred acquisition costs or related intangible assets. In determining the insurance liability, the Scheme has determined, using current estimates, contractual cash flows arising from claims with a service date prior to year-end (reporting date) that will only be presented for payment after date of signature. The considerations for this calculation have been considered under this provision. There are no embedded options or guarantees in the Scheme. The Scheme has also not entered into reinsurance contracts. Having regard for the above, no shortfall has been identified when considering the measurement of the Scheme’s insurance liabilities.


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6 Personal medical savings accounts (PMSA)

PMSA liability 2019 2018

R'000 R'000

Balance of PMSA liability at the beginning of the year 215 220 217 311

Advances on PMSA (1 065) (782) Net balance on PMSA liability at the beginning of the year 214 155 216 529

PMSA contributions received (Note 8) 90 957 444 835

PMSA liability from amalgamation* 41 632 -

Interest on PMSA monies (Note 17) 7 059 6 525

Net transfer from other schemes in terms of Regulation 10(4) 1 610 1 344

Claims paid on behalf of members (Note 9) (159 482) (423 927)

Refunds on death or resignation in terms of Regulation 10(4) (6 395) (4 103)

Prescribed credit write back of unclaimed savings (Note 14) (2 620) (27 331)

Prior year advances recovered during the year (1 065) (782)

Advances on PMSA (Note 3) 9 577 1 065 Balance at the end of the year 195 428 214 155 *Topmed PMSA liability:

- PMSA liability as at 31 July 2019 (Note 21) 63 211 -

- Less advance raising on PMSA (Note 21) (21 579) - At the end of the period 41 632 - Balance of PMSA liability:

- for active members 176 659 203 130

- due to ex-members 18 769 11 025 At the end of the year 195 428 214 155

The PMSA liability contains a demand feature in terms of Regulation 10(4) of the Act that any credit balance on a member’s PMSA must be refunded to the member when the member’s membership is terminated, only if the member does not belong to another medical scheme with a PMSA benefit option, in which case the funds are paid over to the savings benefit option of that scheme.

The carrying amount of the members’ PMSA trust liability approximates its fair value as it is of a short-term nature.

Interest is paid on the PMSA monthly, at a fixed interest rate for 2019 was 4% (2018: 4%). No interest is charged on advances for PMSA.

Prescribed unclaimed credit balances of terminated members were written back to the Scheme income in 2019 to the value of R2.6m (2018: R27.3m).

It is estimated that the claims to be paid out of the members’ PMSA monies in respect of claims incurred in 2019 but not refunded by 31 December 2019 amounted to R18.8m (2018: R25.3m). Advance PMSA liability claims are funded by the Scheme and are included in trade and other receivables.

Advances on PMSA trust liability claims are funded by the Scheme and are included in trade and other receivables (Note 3).


P a g e | 5 6

2019 2018

7 Trade and other payables R'000 R'000

Insurance liabilities

Reported risk claims not yet paid 18 487 26 201

Risk contributions received in advance 6 274 2 738 Total arising from insurance liabilities 24 761 28 939 Financial liabilities

Accrual for investment management fee 31 46

Unknown deposits 174 10

Amounts owing to administrator 625 560

Provision for Topmed audit fees 1 047 -

Other payables and accrued expenses 3 880 3 228

Member loan creditor (Wallet)

36 539 - Total arising from financial liabilities 42 296 3 844 Balance at the end of the year 67 057 32 783

The carrying amounts of financial liabilities approximate their fair value due to the short-term maturities of these liabilities.

Reported risk claims not yet paid:

Balance at the beginning of the year 26 201 29 465

Movement during the year (7 714) (3 264) Balance at the end of the year 18 487 26 201

Reported risk claims not yet paid constitute risk claims that have been received and processed for payment. These risk claims have been accounted for in the relevant healthcare expenditure for the current financial period. Payment of these risk claims will only occur in subsequent periods.

The Scheme's exposure to liquidity risk related to trade and other payables is disclosed in Note 23.


P a g e | 5 7

2019 2018

8 Risk contribution income R'000 R'000

Gross contributions 3 376 529 3 554 438

Less: PMSA contributions received (Note 6) (90 957) (444 835)

Risk contribution income 3 285 572 3 109 603

The PMSA contributions are received by the Scheme in terms of Regulation 10(1) of the Act and the Scheme’s rules.

2019 2018

9 Risk claims incurred R'000 R'000 Current year claims 2 932 401 2 968 159

Claims not covered by risk transfer arrangement 2 931 016 2 966 821

Claims covered by risk transfer arrangement 1 385 1 338

Outstanding risk claims provision 209 237 161 183

Over/(under) provision in the previous year (Note 5) 3 124 (22 196)

Adjustment for the current year (Note 5) 206 113 183 379

Managed care: accredited management services 93 073 82 112

Claims paid from PMSA on behalf of members (Note 6) (159 482) (423 927)

Risk claims incurred 3 075 229 2 787 527

Managed care: accredited management services Hospital benefit management 39 714 34 437

Pharmaceutical benefit management 15 772 13 764

Healthcare professional risk management (networks) 10 560 9 347

Disease management 16 892 15 276

Managed care programme 82 938 72 824

Managed care programme: Aid for Aids Management (Pty) Ltd 10 135 9 288 93 073 82 112 Managed care services paid to administrators

Managed care programme: Medscheme (Note 18) 79 787 72 824

Managed care programme: PHA (winddown fees) 2 788 - 82 575 72 824

The managed care fee is charged as a composite fee based on an estimated allocation by the managed care organisation and the above allocation is based on that organisation’s estimated cost of the services provided.


P a g e | 5 8

2019 2018

10 Net income on risk transfer arrangement R'000 R'000 Iso Leso Optics Ltd (Iso Leso)

Risk transfer arrangement premiums paid (975) (885)

Recovery from risk transfer arrangement 1 385 1 338

410 453

The Scheme has a capitation agreement with Iso Leso. Its primary objective is to manage eye care so that medical scheme benefits are well designed and sufficient to meet the clinical needs of the patient. Iso Leso provides comprehensive eye examinations screening for glaucoma and single vision and bifocal spectacles for MyFed beneficiaries.

These costs are estimates only and are calculated as follows:

Iso Leso provides the Scheme with a report reflecting underlying claims information relating to optometry services covered by the risk transfer arrangement.

Iso Leso provides the average number of visits per annum to an optometrist. The Scheme has applied the Scheme tariff to these to determine the total cost.

The contract is renewable bi-annually and the capitation fee is based on the number of enrolled beneficiaries in the MyFed option.


P a g e | 5 9

2019 2018

11 Administration expenditure R'000 R'000 Administration fees 270 491 242 825

– Medscheme 261 870 242 825

– PHA (winddown fees) 8 621 -

Advertising 59 916 67 921

Amalgamation expenses (Note 21) 176 -

Audit Committee costs (Note 11.1) 156 147

Audit fees 1 159 1 027

– in respect of the current year 307 210

– in respect of the previous year 852 817

Bank charges 1 897 1 501

Board of Healthcare Funders: Practice Code Numbering System (PCNS) 159 149

Conference fees 140 97

Consulting fees 2 307 2 165

Debt collection fee 150 50

Fidelity guarantee premium 300 300

Insurance Fraud Management 2 919 2 712

Health Funders Association 259 240

Independent Counselling and Advisory Service (ICAS) - 25

Legal fees 970 120

Maternity Programme 370 1 891

Meeting expenses 99 65

Metrofile 6 -

Office rental - 34

Principal Officer's fees 3 309 2 841

Principal Officer's remuneration 3 166 2 729

Principal Officer's expenses 143 112

Printing and photocopying 1 959 1 920

RAF recovery fees 4 493 4 578

Registrar’s levies 2 818 2 627

Salaries and reimbursements 1 693 1 732

Strategic projects 287 -

Total Board Members’ remuneration 4 980 3 958

– fees for holding of office (Note 11.1) 4 544 3 727

– travel and accommodation (Note 11.1) 436 231

Balance at the end of the year 361 013 338 925


P a g e | 6 0

11.1 Administration expenditure (continued)

Remuneration and expenses of the Board

Members and Audit Committee

Fees for holding office

Travel and

Accomo- dation

Audit Committee

meeting fees

Total fees and

Expenses

Fees for holding office

Travel and

Accomo- dation

Audit Committee

meeting fees

Total fees and Expenses

R'000 R'000 R'000 R'000 R'000 R'000 R'000 R'000

2019 2018 N Byrne 166 40 - 206 - - - -

J Cloete 388 - - 388 373 - - 373

M Duly 388 13 - 401 373 7 - 380

G Eloff 388 46 - 434 373 25 - 398

A Fourie 166 28 194 - - - -

M Govender 388 - - 388 373 - - 373

P Hemus 388 73 - 461 373 56 - 429

T Jackson 776 73 - 849 532 50 - 582

Dr M Mojapelo-Mokotedi 388 32 - 420 373 13 - 386

C Norton 388 40 - 428 373 40 - 413

N Parker 388 48 - 436 584 40 - 624

D Tretheway 166 33 - 199 - - - -

J Viljoen 166 10 - 176 - - - -

Board Member Costs 4 544 436 - 4 980 3 727 231 - 3 958

Independent: P Brink - - 67 67 - - 62 62

Independent: H Kajie - 11 33 44 - 11 32 43

Independent: B Phillips - - 45 45 - - 42 42

Audit Committee Costs - 11 145 156 - 11 136 147

Total 4 544 447 145 5 136 3 727 241 136 4 105


P a g e | 6 1

2019 2018

12 Net impairment loss on healthcare receivables R'000 R'000 Trade and other receivables Contributions not recoverable (1 118) (2 765)

- Increase in impairment (701) (2 104)

- Impairment recognised directly in profit or loss (417) (661)

Members' and service providers' portions not recoverable (12 659) (10 826)

- Increase in impairment (5 079) (4 338)

- Impairment recognised directly in profit or loss (7 580) (6 488)

PMSA advances not recoverable (2 405) 198

- (Increase)/decrease in impairment (2 405) 198

Loans to members (MediVault) not recoverable (2 729) -

- Increase in impairment (2 729) -

Net movement in impairment (Note 3) (18 911) (13 393)

Previous impairment losses recovered 1 866 1 064

Balance as at the end of the year (17 045) (12 329)

2019 2018

13 Investment income R'000 R'000 Net fair value realised on disposal (Note 17) 37 671 (422)

Realised gains from available-for-sale investments 114 743 79 937

Realised losses from available-for-sale investments (77 072) (80 359)

Dividends received 28 967 12 313

Interest received 79 836 84 160

Interest received on investments: Medical Scheme 66 848 58 182

Interest income from cash and cash equivalents: Medical Scheme 12 988 25 978

Balance at the end of the year 146 474 96 051


P a g e | 6 2

2019 2018

14 Sundry income R'000 R'000

Sundry income 12 18

Prescribed credit write back of unclaimed savings (Note 6) 2 620 27 331

Administration penalty 2 895 -

Fraud recoveries 3 133 3 883 Balance at the end of the year 8 660 31 232

2019 2018

15 Asset management fees R'000 R'000

Investment management fees 6 876 5 037

Investment expenses 271 198 Cash management fees 600 668 Balance at the end of the year 7 747 5 903


P a g e | 6 3

16 Operations per benefit option

Benefit design of the Scheme

The Scheme provides three product ranges and a low cost option, MyFed. The product ranges caters for market segments at different life stages from comprehensive options, MaxiFed (Maxima Plus, Maxima Exec and Maxima

Exec GRID for conservative and sicker members to discounted options, FlexiFed (11 options), for young and healthy

members. The more comprehensive options have higher benefit limits, lower co-payments and better day-to-day

benefits. The ELECT and GRID options are efficiency discount options (EDO), which contain the same level of benefits as

the main options at a discounted contribution rate. For these options medical services should be obtained from the Scheme Networks. MaxiFED Options

The MaxiFED options generally provide more comprehensive in-hospital benefits than the FlexiFED options, with virtually no deductibles and more generous limits on certain procedures. The MaxiFED options also cover more chronic diseases than the FlexiFED options. MaximaPLUS provides for the richest benefits in this range. This option has a medical savings account (savings), as well as a safety net (threshold) benefit. It also provides for day-to-day benefits from OHEB (out-of-hospital expense benefit) risk pool after member used up their savings.

FlexiFED options

All the options in the FlexiFED options have co-payments on a number of in-hospital procedures. In-hospital limits differ by option, with the limits reducing across the options. The same also applies to the MediVault benefits. Chronic medicine is limited to Chronic Disease List (CDL) only for FlexiFED1 and FlexiFED2 (including EDOs). These options

provide for a small medical savings account and a MediVault account that can be activated by the member. The ELECT and GRID options have hospital networks.

MyFed

The MyFed option is structured differently from the options in the MaxiFED and FlexiFED options. It does not provide for any OHEB, savings or threshold benefits. Rather, day-to-day benefits are specified with individual limits on benefits. All day-to-day benefits, except dental benefits, can only be accessed after referral by a contracted General Practitioner (GP). The GP is used as the gatekeeper and coordinator of all care, with the exception of dental benefits. All in-hospital limits are also significantly lower than on the MaxiFED or FlexiFED options and the option has a hospital network.

Refer to option mapping diagram on next page.


P a g e | 6 4

16 Operations per benefit option (continued)

Diagram of option mapping from 2018 to 2019 product range:

2018

2019


P a g e | 6 5

FlexiFed 1 FlexiFed 1

Elect FlexiFed 2 FlexiFed 2 Grid FlexiFed 2

Elect Subtotal

carried forward 16 Operations per benefit option (continued) R'000 R'000 R'000 R'000 R'000 R'000

2019 Net risk contribution income 542 909 18 378 200 263 129 397 5 530 896 477

Relevant healthcare expenditure (426 463) (12 753) (195 475) (116 290) (4 928) (755 909)

Net claims incurred (426 463) (12 753) (195 475) (116 290) (4 928) (755 909)

Risk claims incurred (412 368) (12 410) (189 599) (113 857) (4 823) (733 057) Claims paid from PMSA on behalf of the member (16 054) (434) (6 473) (2 790) (122) (25 873)

Third party claims recoveries 1 959 91 597 357 17 3 021

Net income on risk transfer arrangements - - - - - -

Risk transfer arrangement fees/premiums paid - - - - - - Recoveries from risk transfer arrangements - - - - - -

Gross healthcare result 116 446 5 625 4 788 13 107 602 140 568 Broker service fees (15 716) (520) (4 866) (3 389) (148) (24 639)

Administration expenses (95 133) (4 417) (25 681) (17 719) (841) (143 791)

Net impairment losses on healthcare receivables (5 830) (70) (952) (436) (12) (7 300)

Net healthcare result (233) 618 (26 711) (8 437) (399) (35 162) Other income 38 953 1 774 10 430 7 335 334 58 826

Fraud Recovery 801 38 216 150 7 1 212 Investment income: Medical Scheme 37 672 1 736 10 012 7 172 327 56 919

Prescribed credit write back of unclaimed savings 121 - 69 - - 190 Administration penalty 356 - 132 12 - 500

Sundry income 3 - 1 1 - 5

Other expenditure (2 356) (101) (737) (431) (20) (3 645)

Asset management fees (1 992) (93) (531) (379) (17) (3 012) Interest on PMSA (364) (8) (206) (52) (3) (633) Net surplus/(deficit) for the year 36 364 2 291 (17 018) (1 533) (85) 20 019

Number of members per option 21 400 1 123 5 288 4 711 189 32 711


P a g e | 6 6

Subtotal carried

forward

FlexiFed 4 Grid

FlexiFed 4 Elect

Maxima Plus

Maxima Exec

Subtotal carried

forward 16 Operations per benefit option (continued) brought forward FlexiFed 3

FlexiFed 3 Grid

FlexFed 3 Elect FlexiFed 4

R'000 R'000 R'000 Flexied 3 Elect

R'000 R'000 R'000 R'000 R'000 R'000 2019

Net risk contribution income 896 477 584 864 62 638 4 669 1 085 166 45 378 23 258 174 897 311 457 3 188 804

Relevant healthcare expenditure (755 909) (550 309) (67 762) (4 819) (1 015 116) (43 302) (21 327) (192 832) (313 756) (2 965 132)

Net claims incurred (755 909) (550 309) (67 762) (4 819) (1 015 116) (43 302) (21 327) (192 832) (313 756) (2 965 132)

Risk claims incurred (733 057) (536 043) (66 281) (4 737) (965 538) (41 792) (20 092) (182 109) (265 751) (2 815 400) Claims paid from PMSA on behalf of the member (25 873) (15 634) (1 641) (96) (52 253) (1 596) (1 290) (10 861) (48 396) (157 640) Third party claims recoveries 3 021 1 368 160 14 2 675 86 55 138 391 7 908

Net income on risk transfer arrangements - - - - - - - - - -

Risk transfer arrangement fees/premiums paid - - - - - - - - - - Recoveries from risk transfer arrangements - - - - - - - - - -

Gross healthcare result 140 568 34 555 (5 124) (150) 70 050 2 076 1 931 (17 935) (2 299) 223 672

Broker service fees (24 639) (11 896) (1 356) (113) (19 901) (726) (597) (1 132) (3 275) (63 635)

Administration expenses (143 791) (66 500) (7 702) (663) (97 685) (4 139) (2 613) (6 698) (18 927) (348 718)

Net impairment losses on healthcare receivables (7 300) (4 070) (126) (9) (3 860) (67) (71) (258) (925) (16 686)

Net healthcare result (35 162) (47 911) (14 308) (935) (51 396) (2 856) (1 350) (26 023) (25 426) (205 367) Other income 58 826 27 398 3 071 264 41 830 1 644 1 161 3 294 7 940 145 428

Fraud Recovery 1 212 560 65 6 818 35 22 56 159 2 933 Investment income: Medical Scheme 56 919 26 303 3 005 258 37 767 1 609 1 011 2 654 7 451 136 977

Prescribed credit write back of unclaimed savings 190 272 - - 1 424 - 31 472 226 2 615

Administration penalty 500 261 1 - 1 818 - 97 112 103 2 892

Sundry income 5 2 - - 3 - - - 1 11

Other expenditure (3 645) (1 993) (196) (18) (6 748) (147) (110) (318) (1 122) (14 297)

Asset management fees (3 012) (1 391) (159) (14) (2 000) (85) (54) (140) (393) (7 248) Interest on PMSA (633) (602) (37) (4) (4 748) (62) (56) (178) (729) (7 049)

Net surplus/(deficit) for the year 20 019 (22 506) (11 433) (689) (16 314) (1 359) (299) (23 047) (18 608) (74 236)

Number of members per option 32 711 14 962 1 636 140 18 967 837 500 1 484 4 146 75 383


P a g e | 6 7

Subtotal brought forward

Maxima Exec Grid MyFed Grand Total 16 Operations per benefit option (continued)

R'000 R'000 R'000 R'000 2019

Net risk contribution income 3 188 804 11 812 84 956 3 285 572

Relevant healthcare expenditure (2 965 132) (23 763) (77 508) (3 066 403)

Net claims incurred (2 965 132) (23 763) (77 918) (3 066 813)

Risk claims incurred (2 815 400) (21 939) (78 408) (2 915 747) Claims paid from PMSA on behalf of the member (157 640) (1 842) - (159 482) Third party claims recoveries 7 908 18 490 8 416

Net income on risk transfer arrangements - - 410 410

Risk transfer arrangement fees/premiums paid - - (975) (975) Recoveries from risk transfer arrangements - - 1 385 1 385

Gross healthcare result 223 672 (11 951) 7 448 219 169

Broker service fees (63 635) (141) (2 733) (66 509)

Administration expenses (348 718) (852) (11 443) (361 013)

Net impairment losses on healthcare receivables (16 686) (45) (314) (17 045)

Net healthcare result (205 367) (12 989) (7 042) (225 398) Other income 145 428 340 9 366 155 134

Fraud Recovery 2 933 7 193 3 133 Investment income: Medical Scheme 136 977 333 9 164 146 474 Prescribed credit write back of unclaimed savings 2 615 - 5 2 620

Administration penalty 2 892 - 3 2 895

Sundry income 11 - 1 12

Other expenditure (14 297) (29) (480) (14 806)

Asset management fees (7 248) (19) (480) (7 747) Interest on PMSA (7 049) (10) - (7 059)

Net surplus/(deficit) for the year (74 236) (12 678) 1 844 (85 070)

Number of members per option 75 383 193 4 239 79 815


P a g e | 6 8

Ultimax Maxima Plus Maxima Exec Maxima

Standard Maxima

Standard Elect Subtotal

carried forward 16 Operations per benefit option (continued) R'000 R'000 R'000 R'000 R'000 R'000

2018 Net risk contribution income 27 204 147 258 332 633 1 086 008 23 441 1 616 544

Relevant healthcare expenditure (24 217) (142 400) (343 147) (976 470) (13 735) (1 499 969)

Net claims incurred (24 217) (142 400) (343 147) (976 470) (13 735) (1 499 969)

Risk claims incurred (22 617) (133 126) (316 676) (757 219) (8 953) (1 238 591) Claims paid from PMSA on behalf of the member (1 618) (9 397) (26 881) (221 397) (4 842) (264 135)

Third party claims recoveries 18 123 410 2 146 60 2 757

Net income on risk transfer arrangements - - - - - -

Risk transfer arrangement fees/premiums paid - - - - - - Recoveries from risk transfer arrangements - - - - - -

Gross healthcare result 2 987 4 858 (10 514) 109 538 9 706 116 575 Broker service fees (129) (1 037) (3 260) (21 489) (451) (26 366)

Administration expenses (870) (6 071) (20 312) (105 498) (2 948) (135 699)

Net impairment losses on healthcare receivables (58) (141) (591) (4 789) (167) (5 746)

Net healthcare result 1 930 (2 391) (34 677) (22 238) 6 140 (51 236) Other income 889 2 799 7 875 51 489 914 63 966

Fraud Recovery 9 66 221 1 147 32 1 475 Investment income: Medical Scheme 235 1 638 5 470 28 436 793 36 572

Prescribed credit write back of unclaimed savings 645 1 095 2 184 21 888 89 25 901 Sundry income - - - 18 - 18

Other expenditure (57) (282) (903) (6 187) (115) (7 544)

Asset management fees (14) (100) (336) (1 743) (49) (2 242) Interest on PMSA (43) (182) (567) (4 444) (66) (5 302) Net surplus/(deficit) for the year 2 762 126 (27 705) 23 064 6 939 5 186

Number of members per option 168 1 180 3 992 20 661 583 26 584


P a g e | 6 9

Subtotal carried

forward

Maxima Core Grid

Maxima Saver

Maxima Saver Grid

Maxima Entry Saver

Subtotal carried

forward 16 Operations per benefit option (continued) brought forward

Maxima Advance

Maxima Basis

Maxima Basis Grid

Maxima Core

R'000 R'000 R'000 R'000 R'000 R'000 R'000 R'000 R'000 R'000 2018

Net risk contribution income 1 616 544 138 105 260 670 19 504 297 663 13 703 187 995 48 509 343 977 2 926 670

Relevant healthcare expenditure (1 499 969) (143 824) (224 722) (17 256) (270 872) (15 181) (161 565) (37 363) (262 049) (2 632 801)

Net claims incurred (1 499 969) ( 143 824) (224 722) (17 256) (270 872) (15 181) (161 565) (37 363) (262 049) (2 632 801)

Risk claims incurred (1 238 591) (131 601) (183 280) (14 056) (271 595) (15 219) (130 155) (29 845) (200 885) (2 215 227) Claims paid from PMSA on behalf of the member (264 135) (12 455) (42 057) (3 248) - - (31 929) (7 638) (62 451) (423 913) Third party claims recoveries 2 757 232 615 48 723 38 519 120 1 287 6 339

Net income on risk transfer arrangements - - - - - - - - - -

Risk transfer arrangement fees/premiums paid - - - - - - - - - - Recoveries from risk transfer arrangements - - - - - - - - - -

Gross healthcare result 116 575 (5 719) 35 948 2 248 26 791 (1 478) 26 430 11 146 81 928 293 869

Broker service fees (26 366) (1 725) (5 498) (402) (6 069) (302) (4 715) (1 311) (10 625) (57 013)

Administration expenses (135 699) (11 516) (30 487) (2 407) (35 846) (1 884) (25 806) (7 390) (64 682) (315 717)

Net impairment losses on healthcare receivables (5 746) (260) (1 064) (68) 413 (38) (1 281) (250) (3 192) (11 486)

Net healthcare result (51 236) (19 220) (1 101) (629) (14 711) (3 702) (5 372) 2 195 3 429 (90 347) Other income 63 966 3 828 9 115 667 10 059 526 7 334 2 019 18 022 115 536

Fraud Recovery 1 475 125 331 26 389 20 280 78 702 3 426 Investment income: Medical Scheme 36 572 3 103 8 216 641 9 670 506 6 927 1 914 17 212 84 761

Prescribed credit write back of unclaimed savings 25 901 600 568 - - - 127 27 108 27 331

Sundry income 18 - - - - - - - - 18

Other expenditure (7 544) (430) (941) (55) (592) (31) (648) (142) (1 351) (11 734)

Asset management fees (2 242) (190) (504) (40) (592) (31) (426) (120) (1 064) (5 209) Interest on PMSA (5 302) (240) (437) (15) - - (222) (22) (287) (6 525)

Net surplus/(deficit) for the year 5 186 (15 822) 7 073 (17) (5 244) (3 207) 1 314 4 072 20 100 13 455

Number of members per option 26 584 2 265 5 963 517 6 984 386 5 219 2 138 13 965 64 021


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Subtotal brought forward

Maxima Entry Zone Blue Door Plus Dynamic Saver

Dynamic Hospital Grand Total 16 Operations per benefit option (continued)

R'000 R'000 R'000 R'000 R'000 R'000 2018

Net risk contribution income 2 926 670 108 288 74 645 - - 3 109 603

Relevant healthcare expenditure (2 632 801) (77 300) (69 680) (140) 20 (2 779 901)

Net claims incurred (2 632 801) (77 300) (70 133) (140) 20 (2 780 354)

Risk claims incurred (2 215 227) (77 714) (70 553) (126) 20 (2 363 600) Claims paid from PMSA on behalf of the member (423 913) - - (14) - (423 927) Third party claims recoveries 6 339 414 420 - - 7 173

Net income on risk transfer arrangements - - 453 - - 453

Risk transfer arrangement fees/premiums paid - - (885) - - (885) Recoveries from risk transfer arrangements - - 1 338 - - 1 338

Gross healthcare result 293 869 30 988 4 965 (140) 20 329 702

Broker service fees (57 013) (2 542) (2 368) (1) - (61 924)

Administration expenses (315 717) (12 902) (10 306) - - (338 925)

Net impairment losses on healthcare receivables (11 486) (401) (442) - - (12 329)

Net healthcare result (90 347) 15 143 (8 151) (141) 20 (83 476) Other income 115 536 5 781 5 966 - - 127 283

Fraud Recovery 3 426 225 232 - - 3 883 Investment income: Medical Scheme 84 761 5 556 5 734 96 051 Prescribed credit write back of unclaimed savings 27 332 - - - - 27 332

Sundry income 18 - - - - 18

Other expenditure (11 734) (342) (352) - - (12 428)

Asset management fees (5 209) (342) (352) - - (5 903) Interest on PMSA (6 525) - (6 525)

Net surplus/(deficit) for the year 13 455 20 582 (2 536) (141) 20 31 379

Number of members per option 64 021 4 300 4 487 - - 72 808


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17

Cash flows utilised in operations before working capital changes

2019 2018

R'000 R'000 Net (deficit)/surplus for the year (85 070) 31 379

Adjustments for:

– net movement in allowance for impaired receivables 10 913 6 244

– investment income: Medical Scheme (108 803) (96 473)

– interest paid on PMSA liability (Note 6) 7 059 6 525

– net fair value realised on disposal (Note 13) (37 671) 422 Balance as at the end of the year (213 572) (51 903)

2019 2018

18 Related party transactions R'000 R'000

The administrator and its associates

Medscheme Holdings (Pty) Ltd, the administrator, Aid for Aids Management (Pty) Ltd, AfroCentric Technologies (Pty) Ltd, Klinikka (Pty) Ltd, Pharmacy Direct (Pty) Ltd, The Cheese Has Moved (Pty) Ltd and Wellworx (Pty) Ltd are subsidiaries of AfroCentric Health (Pty) Ltd and provide key management services to the Scheme. Wellworx is an authorised Financial Services Provider (FSP: 46017), mandated by the Scheme to sell Fedhealth and other complimentary financial service products. PHA managed the Topmed winddown after amalgamation. These entities participate in the financial and operational activities of the Scheme, but do not control the Scheme. The administrator and its associates have been included due to the significance of the outsourcing relationship.

Statement of comprehensive income

Medscheme Holdings (Pty) Ltd 345 487 322 093

– Actuarial fees 1 974 1 867

– Administration fees 261 870 242 825

– Administration penalty (2 620) -

– Insurance Fraud Management (IFM) 2 919 2 712

– Managed care: management services 79 787 72 824

– Third party collection administration services 1 557 1 865

AfroCentric Health (Pty) Ltd 94 775 81 213

– Aid for Aids Management 10 135 9 288

– AfroCentric Technologies (Previously: Helios IT Solutions) (1 755) (1 076)

– Klinikka 2 128 1 205

– Pharmacy Direct 21 198 20 802

– PHA

– Administration winddown fee 8 621 -

– Managed care winddown fee 2 788 -

– The Cheese Has Moved 41 696 43 079

– Wellworx 9 964 7 915

Statement of financial position

Medscheme Holdings (Pty) Ltd 755 (1 582)

– Administration fees 194 (2 265)

– Aid for Aids Management (8) (3)

– Managed care: management services 431 560

– Third party collection administration services 138 126


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2019 2018

18 Related party transactions (continued) R'000 R'000 Statement of financial position (continued)

AfroCentric Health (Pty) Ltd – AfroCentric Technologies (1 454) 3 209

Terms and conditions of administration and managed care agreements

The administration and managed care agreements comply with the rules of the Scheme and are in accordance with instructions given by the Board of Trustees (the Board). The agreements comply with the Act and are automatically renewed each year unless notification of termination is received. The outstanding balances are due within 30 days.

Key management personnel of the Scheme

The Board Members, Principal Officer, Scheme employees, their dependants and close family members

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Scheme. Key management personnel include the Board Members, Principal Officer and Scheme employees. Close family members are members and dependants of the Board Members, Principal Officer and Scheme employees are therefor also related parties.

Statement of comprehensive income

Board Members' fees for holding of office and related expenses and Principal Officer's remuneration and expenses 8 309 6 820

– Risk contributions received in terms of the Scheme's rules 531 584

– Risk claims incurred in terms of the Scheme's rules (247) (310)

Statement of financial position

– PMSA liability (6) -

– Loan to member (Wallet) liability (15) -

– Loan to member (MediVault) debtors 9 -

– Risk contribution debtors 57 -

The terms and conditions of the related party transactions were as follows:

Remuneration and expenses

This constitutes remuneration and disbursements paid to the Principal Officer and Board Members for services rendered.

Risk contributions received

This constitutes the risk contributions paid by the related parties as members of the Scheme, in their individual capacities. All contributions are on the same terms as applicable to Scheme members.

Risk claims incurred

This constitutes risk claims from related parties, in their individual capacities as members of the Scheme. All risk claims are paid out in terms of the rules of the Scheme, as applicable to Scheme members.

Risk contribution debtors

This constitutes risk contributions that are payable in arrears as stipulated in the rules of the Scheme. None of these debts are doubtful and thus no impairment for doubtful debts has been raised on these amounts.

Loan to members

This constitutes an interest-free loan transferred from the MediVault benefit to the member's Wallet account. The member only pay back the money transferred from the MediVault to the Wallet - interest free over a maximum period of twelve (12) months. The instalments are payable in arrears, none of these debts are doubtful and thus no impairment for doubtful debt has been raised on these amounts.


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19 Non-compliance matters

Nature and cause of non-compliance Possible impact of the non-compliance Corrective course

19.1 Contributions not received within the time stipulated by the Act

Section 26(7) of the Act states that: “All subscriptions or contributions shall be paid directly to a medical scheme not later than three days after payment thereof becoming due." Exceptions were found and credit control procedures were applied.

Late payment may result in a loss of interest on these amounts to the Scheme for the number of days that payment is late. This is not significant due to the short duration of the contributions outstanding. Members and employer groups are continuously instructed to submit payment on time.

The Board addresses the issue on an ongoing basis in accordance with the Scheme’s credit control policy.

19.2 Claim payments in excess of 30 days Section 59(2) of the Act states that: "A medical scheme shall, in the case where an account has been rendered, subject to the provisions of this Act and the rules of the medical scheme concerned, pay to a member or a supplier of service, any benefit owing to that member or supplier of service within 30 days after the day on which the claim in respect of such benefit was received by the medical scheme." Exceptions were found at the beginning of the financial year when claims are put on hold, to ensure that the approved tariff and benefit limits are loaded correctly on the administration platform. This process results in a delay in the processing of payments due to the backlog in claims, but only for a few days.

The delay only occurs at the beginning of the financial year when new tariffs and benefit limits are loaded; claims are paid within the first week of tariff and benefit limit approval.

The Scheme is not compliant with the Act and/or its rules when certain valid claims are rejected or amounts due on valid claims are short paid.

The year-end process is not considered to be significant due to the members and providers conforming to the annual practice. The practice ensures accurate claims processing for the new benefit year and is in the interest of the risk management process for the Scheme.




The Scheme was specifically costed to incur net healthcare deficits on certain options. The Scheme actuary has taken this into account in costing the benefits for the 2020 financial year.


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19 Non-compliance matters (continued)

Nature and cause of non-compliance Possible impact of the non-compliance Corrective course




The Scheme was specifically costed to incur net healthcare deficits on certain options. The Scheme actuary has taken this into account in costing the benefits for the 2019 financial year.

19.4 Prohibition of Investments in an employer who participates in the medical scheme or in any administrators

Section 35(8)(a), (c) and (d) of the Act sets out the prohibition of investments in participating employer and administrators. The Scheme is currently invested in Discovery Holdings Ltd, Liberty Holdings Ltd, Standard Bank Group Ltd, MMI Holdings Ltd, Sanlam Life Insurance Ltd and Sanlam Ltd through portfolios managed by underlying investment managers.

The Scheme is non-compliant with Section 35(8). The Council may require the Scheme to disinvest from these companies.

The Council renewed the exemption, as none of these companies have any influence over the Scheme and the Scheme does not have any influence over these entities in which it holds investments.


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20 Critical accounting judgments and areas of key sources of estimation uncertainty

In the process of applying the Scheme’s accounting policies, the Board has made the following judgments that have the In the process of applying the Scheme’s accounting policies, the Board has made the following judgments that have the most significant impact on the amounts recognised in the financial statements.

Certain critical accounting judgments in applying the Scheme’s accounting policies and key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next financial year, are discussed below.

The ultimate liability arising from risk claims made under medical insurance contracts There are some sources of uncertainty that need to be considered in the estimation of the liability that the Scheme will ultimately pay for such risk claims. Initial estimates are made relating to the best calculations on reported risk claims and are derived as the risk claims process develops. All estimates are revised and adjusted at year-end by management. Refer to Note 5 for the method used to calculate the outstanding risk claims provision.

Other judgements and estimates The Scheme has involvement with investment funds in which it invests but it does not consolidate. The investment funds meet the definition of structured entities because:

the voting rights in the funds are not dominant rights in deciding who controls them because they relate to administrative tasks only;

each fund's activities are restricted by prospectus; and

the funds’ have narrow and well-defined objectives to provide investment opportunities.


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21 Amalgamation

An amalgamation between Fedhealth and Topmed (Registration number 1422) was confirmed and became effective from 1 August 2019. The disclosures provided below have been provided to enable users to evaluate the nature and financial effect of the amalgamation.

Topmed was a not-for-profit open medical scheme registered in terms of the Act.

In terms of the Act, medical schemes do not have equity therefore the Scheme did not acquire any voting equity interest. The members of the Scheme and Topmed voted that the amalgamation of Topmed with the Scheme would be in the best interest of the Topmed members.

The Scheme obtained control of Topmed by means of the exposition requirements as set out in Section 63 of the Act.

On the date of the amalgamation 15 808 principal members and 30 387 beneficiaries joined the Scheme.

No goodwill was recognised as a result of this transaction.


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21 Amalgamation (continued)

STATEMENT OF FINANCIAL POSITION The acquisition date fair value of the total consideration transferred and the acquisition date fair value of each major class of assets and liabilities was: 31 July 2019

TOPMED MEDICAL SCHEME R'000

Reserves effectively transferred:

(Acquisition date fair value of Topmed members' interest) 434 875 Net recognised values of Topmed identifiable assets and liabilities 434 875

Assets

Non-current assets 503 811

Investment held at fair value through profit and loss 503 811

Current assets 65 284

Trade and other receivables 32 662

Cash and cash equivalents 32 622 - Current liabilities (134 220)

Outstanding risk claims provision (31 318)

PMSA liability (Note 6) (63 211)

Trade and other payables (39 691)

Net recognised values of Topmed identifiable assets and liabilities 434 875 Amalgamation expenses (Note 11) (176) Total funds and liabilities 434 699


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21 Amalgamation (continued)

TOPMED MEDICAL SCHEME AMALGAMATION DISCLOSURE 31 July 2019 31 July 2019

TOPMED MEDICAL SCHEME R'000 R'000

Trade and other receivables acquired Fair value

Gross contractual

value Insurance Receivables 32 662 39 759 Members co-payments receivable 218 218

Provider debts receivable 305 305

Contribution debts receivable 16 841 16 841

Advances on PMSA 21 579 21 579

Other accounts receivables 816 816

Provision for impairment (7 097) -

31 December 2019

TOPMED MEDICAL SCHEME R'000 Best estimate at the acquisition date of the contractual cashflows not expected to be collected are:

Insurance Receivables 5 716 Members co-payments receivable 3

Provider debts receivable 25

Contribution debts receivable 100

Advances on PMSA 5 588


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22 Insurance risk management

The Board acknowledges its responsibility for establishing and communicating appropriate risk and control policies and ensuring that adequate risk management processes are in place. The Scheme has a number of committees which deal with the various policies for accepting risks, including selection and approval of risks to be insured, use of limits and avoiding undue concentrations of risk, and underwriting strategies to ensure appropriate risk classification and premium levels.

Risk management objectives and policies for mitigating insurance risk The primary insurance activity carried out by the Scheme assumes the risk of loss from members and their dependants that are directly subject to the risk. The risks relate to the health of the Scheme members. As such, the Scheme is exposed to uncertainty surrounding the timing and severity of claims under the contract. Details regarding the subsequent claims development in respect thereof have been disclosed in Note 5. The Scheme also has exposure to market risk through its insurance and investment activities.

The Scheme manages its insurance risk through benefit limits and sub-limits, approval procedures for transactions that involve pricing guidelines, pre-authorisations and case management, service provider profiling as well as the monitoring of emerging issues.


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22 Insurance risk management (continued)

The Scheme uses several methods to assess and monitor medical insurance risk exposures both for individual types of risks insured and overall risks. These methods include internal risk measurement models, sensitivity analyses, scenario analyses and stress testing. The theory of probability is applied to the pricing and provisioning for a portfolio of insurance contracts. The principal risk is that the frequency and severity of risk claims are greater than expected.

Medical insurance events are, by their nature, random and the actual number and size of events during any one year may vary from those estimated using established statistical techniques.

Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The Scheme has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome.

In-hospital benefits cover all costs incurred by members, whilst they are in hospital to receive pre-authorised treatment for certain medical conditions.

Chronic benefits cover the cost of certain prescribed medicines utilised by members for chronic conditions such as high blood pressure, cholesterol and asthma.

Day-to-day benefits cover the cost (up to 100% of the Scheme’s tariff) of out-of-hospital medical attention, such as visits to general practitioners and dentists as well as prescribed non-chronic medicines.

The Scheme’s strategy seeks diversity of risk to ensure a balanced risk profile and is based on a large pool of similar risks over a period of time and, as such, it is believed that this reduces the variability of the outcome.

The strategy is set out in the annual budget and benefit guide, which specifies the benefits to be provided by each option, the preferred target market and demographic split thereof.

All the contracts are periodic in nature and the Scheme has the right to change the terms and conditions of the contract at renewal. Management information including contribution income and claims ratios by option, target market and demographic split, is reviewed monthly. There is also an underwriting review programme that regularly reviews a sample of contracts to ensure adherence to the Scheme’s objectives.

Medical insurance risks facing the Scheme

Adequacy of contributions

The most significant medical insurance risk that the Scheme faces is the risk that contributions are not sufficient to cover claims expenditure and other expenses, and are further not sufficient to maintain the accumulated funds ratio of the Scheme at the required level. However, subject to the approval of the Council, the Scheme is able to reset contributions for a change in circumstances.


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22 Insurance risk management (continued) Concentration of risk

The following table summarises the concentration of insurance risk, net of the risk transfer arrangement, with reference to the carrying amount of the insurance claims incurred in relation to the type of benefit provided:

2019 2018

Provider categories % R'000 % R'000

Medical practitioners 3.22% 94 254 3.77% 101 132

Medical specialists 32.49% 951 184 32.02% 859 527

Hospitals 47.94% 1 403 162 48.01% 1 288 988

Medicines 10.74% 314 495 10.53% 282 743

Optical 0.12% 3 642 0.21% 5 647

Dentistry 0.30% 8 873 0.47% 12 584

Paramedical services 4.12% 120 696 3.88% 104 078

Physiotherapy 1.06% 31 048 1.09% 29 345

Associated health services 0.01% 290 0.02% 632 Total 100.00% 2 927 644 100.00% 2 684 676 Distribution of principal members across options at year-end

2019 2018

Option name % Membership % Membership

Maxima Plus 1.86% 1 484 1.62% 1 180

Maxima Exec 5.19% 4 146 5.48% 3 992

Maxima Exec Grid 0.24% 193 0.00% -

FlexiFed1 (Maxima EntrySaver) 26.80% 21 400 19.18% 13 965

FlexiFed1 Elect (Maxima Saver Grid) 1.41% 1 123 2.94% 2 138

FlexiFed2 (Maxima Saver) 6.63% 5 288 7.17% 5 219

FlexiFed2 Grid 5.90% 4 711 0.00% -

FlexiFed2 Elect 0.24% 189 0.00% -

FlexiFed3 (Maxima Basis) 18.75% 14 962 8.19% 5 963

FlexiFed3 Grid (Maxima Basis Grid) 2.05% 1 636 0.71% 517

FlexiFed3 Elect 0.18% 140 0.00% -

FlexiFed4 (Maxima Standard) 23.76% 18 967 28.38% 20 661

FlexiFed4 Grid 1.05% 837 0.00% -

FlexiFed4 Elect (Maxima Standard Elect) 0.63% 500 0.80% 583

MyFed (Blue Door Plus) 5.31% 4 239 6.16% 4 487

Ultimax (merged with Maxima Plus) 0.00% - 0.23% 168

Maxima Advance (merged with FlexiFed4) 0.00% - 3.11% 2 265

Maxima Core (merged with FlexiFed3) 0.00% - 9.59% 6 984

Maxima Core Grid (merged with FlexiFed3 Grid) 0.00% - 0.53% 386

Maxima EntryZone (merged with FlexiFed1) 0.00% - 5.91% 4 300

Total 100.00% 79 815 100.00% 72 808


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Qualitative risk factors

A major source of uncertainty in the current legislative and market environment is:

The continued absence of a standard reference price, previously applicable by the Scheme to services where no prior negotiated fee existed, means that reimbursement for 2020 for these services is assumed to be at the 2019 Scheme Rate plus 4.5%. Should a 2020 Reference Price List be published, or a statutory pricing body intervene, the 2020 Scheme Rate may be too low, and this could pose a significant financial risk to the Fund (although the rates negotiated with some disciplines provide a degree of protection). The likelihood of this change is considered small, although the recommendation from the Health Market Inquiry may kick-start such processes.

Prescribed Minimum Benefit (PMB). The legal challenge based on the interpretation that PMB claims should be funded at the invoiced price has been dismissed. This issue still remains a material risk to the Scheme. General Practitioner and Specialist Networks have been implemented and this should mitigate the risk to a large extent.

A major source of uncertainty in the current legislative and market environment is the introduction of National Health Insurance (NHI), most recently with the latest iteration of the National Health Insurance Bill that was tabled in Parliament on 8 August 2019. The Bill provides key details regarding the policy trajectory that is envisaged for the South African health system. A system of "mandatory prepayment" is earmarked, with funding to take place through social solidarity taxation principles. According to the Bill, the NHI Fund is to be fully operational by 2026 and, once NHI has been fully implemented, medical scheme cover would be complementary to NHI cover. The exact services specified under the Bill is not yet defined, but this is intended to be "comprehensive healthcare services".

These are large-scale changes that would affect private providers of care and it is therefore clear that NHI in its current proposed form will have a major impact on medical schemes; however, no explicit allowance has been made for these developments in the 2020 contribution review. It should be noted that there is a possible risk of an increase in utilisation in the medium term - especially of elective services - as members may want to access these benefits earlier due to the expectation that might exist that such services may no longer be available from medical scheme cover at some point in the future. The NHI draft bill does not detail explicit provisions that there will be any significant changes in the role, structure and functioning of the Medial Schemes industry.

Competition Commission Healthcare Market Inquiry – The Competition Commission has established a market inquiry into the private healthcare sector in terms of Chapter 4A of the Competition Act, 89 of 1998 (as amended). The aim of this inquiry is to help identify the factors driving increased expenditure as well as the market dynamics at play within the healthcare industry.

Following several iterations of public hearings, submissions and interviews, the Provisional Findings and Preliminary Recommendations of the Health Market Inquiry (HMI) were published on 5 July 2018. The Final Report was released in October 2019. This publication is a culmination of a long process of engagements that Medscheme has been continuously involved in over the four years and Medscheme has made many technical submissions on matters pertaining to market structure, tariffs, negotiation processes, market power, as well as supplier induced demand. It is yet to be established what the ultimate impact of this exercise will be and therefore no impact allowance on the 2020 budget has been made.


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Financial sustainability

The major risk affecting the future sustainability of the Scheme is the possibility of a deterioration in the risk profile of members. Schemes with a better member risk profile can offer the same benefits at a lower contribution rate than other schemes, as their members will be claiming less.

If a scheme charges higher contribution rates than the market, it is at risk of losing members and not replacing them. It is typically easier for younger, healthier members to move to another scheme. Should younger, healthier members leave the Scheme, the member risk profile would deteriorate, resulting in even higher contribution rates required.

It is therefore important that the Scheme maintains or improves its member risk profile, by attracting lower risk members and retaining healthy members in the Scheme.

Risk in terms of risk transfer arrangement

The Scheme outsources a portion of the risks it underwrites in order to control its exposure to losses and protect capital resources. The Scheme is contracted with Iso Leso.

The capitation agreement is, in substance, the same as a non-proportional reinsurance treaty.

The Scheme cedes insurance risk to limit exposure to underwriting losses under the agreements that cover individual risks, group risks or defined blocks of business, on a co-insurance, yearly renewable term. The risk transfer arrangement transfers the risk and minimises the effect of losses. The amount of each risk retained depends on the Scheme’s evaluation of the specified risk to maximum limits based on the basis of characteristics of coverage.

According to the terms of the risk transfer arrangement, the third party agrees to reimburse the ceded amount in the event the risk claim is paid. According to the terms of the capitation agreement, the supplier provides certain minimum benefits to all Scheme members as and when required by the members. The Scheme does, however, remain liable to its members with respect to ceded insurance if any reinsurer (or supplier) fails to meet the obligations it assumes.

When selecting an insurer (or supplier) the Scheme considers their relative security. The security of the insurer (or supplier) is assessed from public rating information and from internal investigations.


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23 Financial risk management

The Scheme’s activities expose it to a variety of financial risks, including liquidity, credit and market risk. The Scheme’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potentially adverse effects on the financial performance of investments that the Scheme holds to meet its obligations to its members.

Risk management and investment decisions are made under the guidance and policies approved by the Board. The Investment Committee identifies and evaluates the financial risks associated with the Scheme’s investment portfolio. The Investment Committee provides written principles for investment risk management, as well as written policies covering specific areas, such as liquidity risk, credit risk and interest rate risk. The Board approves all of these written policies.

Liquidity risk management

Liquidity risk is the risk that the Scheme will encounter difficulty in raising funds to meet commitments associated with financial liabilities.

Medical schemes are registered in terms of the Act and are required to maintain a minimum accumulated fund ratio level. The Scheme’s actuary and investment managers continually manage and monitor liquidity and accumulated fund ratio requirements.

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities. The Scheme has complied with the requirements regarding the nature and categories of assets as prescribed by Section 35 and Regulation 30 of the Act. The availability of funding through liquid holding cash positions with various financial institutions ensures that the Scheme has the ability to fund its day-to-day operations.

With the exception of the PMSA refunds due to ex-members, which are generally settled not later than 5 months, trade and other payables are settled between 30 and 60 days.

The table below summarises the Scheme’s exposure to liquidity risk. Included in the table are the Scheme’s assets and liabilities at carrying amounts, categorised by contractual maturities.


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23 Financial risk management (continued)

Up to 1 month 1 - 3 months 3 - 12 months Total

2019 Note R'000 R'000 R'000 R'000 Liquidity analysis

Assets

Non-current assets - 1 159 508 - 1 159 508

Available-for-sale investments 2 - 1 159 508 - 1 159 508

Current assets 799 349 - - 799 349

Trade and other receivables 3 292 352 - - 292 352

Cash and cash equivalents: Medical Scheme assets 4 506 997 - - 506 997 Total assets 799 349 1 159 508 - 1 958 857

Liabilities

Current liabilities 371 288 79 510 20 924 471 722

Outstanding risk claims provision 5 108 803 79 510 20 924 209 237

PMSA liability 6 195 428 - - 195 428

Trade and other payables 7 67 057 - - 67 057

Total liabilities 371 288 79 510 20 924 471 722


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Up to 1 month 1 - 3 months 3 - 12 months Total

2018 Note R'000 R'000 R'000 R'000 Liquidity analysis

Assets

Non-current assets - 725 866 - 725 866

Available-for-sale investments 2 - 725 866 - 725 866

Current assets 763 210 45 000 - 808 210

Trade and other receivables 3 228 574 - - 228 574

Cash and cash equivalents 4 534 636 45 000 - 579 636 Total assets 763 210 770 866 - 1 534 076

Liabilities

Current liabilities 341 657 21 824 44 640 408 121

Outstanding risk claims provision 5 94 719 21 824 44 640 161 183

PMSA liability 6 214 155 - - 214 155

Trade and other payables 7 32 783 - - 32 783

Total liabilities 341 657 21 824 44 640 408 121


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Credit risk management

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation and cause the Scheme to incur a financial loss.

The Scheme’s principal financial assets are cash and cash equivalents, trade and other receivables and available-for-sale investments. The Scheme’s credit risk is primarily attributable to its trade and other receivables. The amounts presented in the statement of financial position are net of impairment. An impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. Cash transactions are limited to high credit quality financial institutions. The Scheme has a policy of limiting the amount of credit exposure to any one financial institution.

Exposure to risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit

risk at the reporting date was:

2019 2018

R'000 R'000

Available-for-sale investments 1 159 508 725 866

Cash and cash equivalents 506 997 579 636

Trade and other receivables 292 352 228 574 Total 1 958 857 1 534 076

Available-for-sale investments and cash and cash equivalents

Funds are invested at various institutions after taking the following criteria into account:

The Scheme's mandate requirements;

Regulations as per the Act;

Credit ratings of the various institutions; and

Interest rates offered by the institutions.

The ratings per institution are noted in the mandates and do vary, but largely a minimum rating of "Aa1" as per Moody's Investors Services Inc. (Moody's) is applied.

Credit risk is contained by adhering to the Act by not investing more than 35% in large banks and 10% in smaller banks. The net qualifying capital and reserves are monitored on a monthly basis to determine the split between large and small banks.

The Scheme limits its exposure to credit risk by only investing in liquid securities with medium grade moderate risk financial institutions. The Scheme has a policy of limiting the amount of credit exposure to any one financial institution. Given these high credit ratings, management does not expect any financial institution to fail to meet its obligations.


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Credit risk management (continued)

Loans and other receivables


The Scheme’s exposure to credit risk is influenced by the characteristics of each member and the demographics of the membership base. Approximately 5.25% (2018: 6.64%) of the Scheme’s contribution income is attributed to the government membership base. However, geographically there is no concentration of credit risk.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics that are indicative of the debtor’s ability to pay all amounts due according to the contractual terms (for example on the basis of a credit risk evaluation or grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Contribution debtors are collected in arrears within 30 days of raising.

In monitoring member credit risk, members are grouped according to their credit characteristics, including whether they are an individual, group or government member, whether the risk arises from contributions or member shortfalls. The Board has approved a credit control policy, thereby managing the credit risk to the Scheme.

2019 2019 2018 2018

R'000 R'000 R'000 R'000

The age analysis of trade and other receivables at the reporting date was:


Impairment


Impairment

Not past due not impaired 265 635 - 216 625 -

Past due 0-30 days 38 214 (11 670) 13 004 (3 639)

Past due 31-60 days 1 159 (989) 1 474 (1 013)

Past due 61-90 days 986 (983) 5 656 (3 533)

More than 90 days 11 046 (11 046) 5 690 (5 690)

- Note 3 317 040 (24 688) 242 449 (13 875)


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Market risk management

Market risk is the risk that changes in market prices, such as interest rates and equity prices will affect the Scheme's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimising the return.

The asset managers buy and sell financial instruments in the ordinary course of business, and also incur financial liabilities, in order to manage market risk. All such transactions are carried out within the guidelines set by the investment mandate on behalf of the Scheme. The asset managers are allowed to invest in local and offshore assets at their discretion, provided that the investments comply fully with the Act and the mandates provided to them by the Scheme.

All the Scheme’s equity investments are listed on the Johannesburg Stock Exchange (the JSE). The concentration, sensitivities and impact on profit or loss and equity are detailed below:

Diversification and concentration

Asset allocation

2019 2018

Asset class R'000 % R'000 %

Cash: Medical Scheme assets 506 997 30.42% 579 636 44.40%

Unlisted debentures 10 231 0.61% 16 488 1.26%

Listed equities 589 957 35.40% 258 136 19.77%

Listed fixed interest bonds 462 754 27.77% 396 552 30.38%

Listed investment property funds 96 566 5.79% 54 690 4.19% Total 1 666 505 100.00% 1 305 502 100.00% Price risk management

Price risk is the risk that the value of the Scheme’s equity investments fluctuate as a result of changes in the market prices of instruments held, whether caused by factors specific to the underlying investments, their issuer or factors affecting all instruments traded in the market.

Price risk is mitigated primarily by diversification. Diversification is achieved through asset allocation, sector diversification and market diversification.

The majority of the Scheme’s investments are simultaneously invested in various sectors of the market as well as various shares within each sector.

Currency risk management

The Scheme operates in South Africa and therefore its cash flows are denominated in Rand. The Scheme had minimal exposure to currency risk during the year under review.


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Interest rate risk management

Interest rate risk is the risk that the value and cash flow of a financial instrument will fluctuate due to changes in market interest rates.

The Scheme’s activities expose it to a variety of financial risks, including the effects of changes in equity market prices and interest rates. The Scheme’s overall risk management programme focuses on the unpredictability of financial markets, and seeks to minimise potentially adverse effects on the financial performance of the investments that the Scheme holds to meet its obligations to its members.

The Scheme’s investment policy during the year under review was to hold certain investments in interest-bearing instruments. The Scheme’s investments were therefore exposed to changes in market interest rates. The fair value of fixed rate instruments has declined in the current period due to the increase in market interest rates. These instruments are exposed to fair value interest rate risk.


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23 Financial risk management (continued) Interest rate risk management (continued)

The table below summaries the Scheme’s exposure to interest rate risks. Included in the table are the Scheme’s financial assets and liabilities at carrying amounts, categorised by contractual maturities.

2019

Up to 1 month 1 – 3 months 1 -5 years Non-interest

bearing Total

Note R'000 R'000 R'000 R'000 R'000 Available-for-sale investments 2 - - 462 754 696 754 1 159 508 Trade and other receivables 3 - - - 100 591 100 591 Trade and other payables 7 - - - (42 296) (42 296)

Cash and cash equivalents 4 426 952 80 045 - - 506 997 Total 426 952 80 045 462 754 755 049 1 724 800

2018

Available-for-sale investments 2 - - 396 552 329 314 725 866 Trade and other receivables 3 - - - 8 886 8 886 Trade and other payables 7 - - - (3 844) (3 844)

Cash and cash equivalents 4 499 591 80 045 - - 579 636 Total 499 591 80 045 396 552 334 356 1 310 545


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23 Financial risk management (continued) Asset managers and mandates Allocation as at 31 December 2019

Segregated Mandate Benchmark R'000 %

Asset Manager

Old Mutual Wealth Trust Co (Pty) Ltd *Cash 143 775 8.63%

Allan Gray Ltd꙳ Stable Medical Fund CPI+3.0% 84 197 5.05%

Prudential Investment Management (Pty) Ltd^ Pooled Mandate CPI+5.0% 152 251 9.14%

Sanlam Investment Management (Pty) Ltd Absolute return CPI+3.5% 348 736 20.93%

Sanlam Investment Management (Pty) Ltd^ Active Income Fund SteFi+1% 95 850 5.75%

Sanlam Private Wealth (Pty) Ltd^ Capped Swix Capital SteFi+1% 185 220 11.11%

Taquanta Asset Management (Pty) Ltd Enhanced cash SteFi+1% 296 387 17.78%

Truffle Asset Managers (Pty) Ltd Absolute return CPI+5% 360 089 21.61% Total 1 666 505 100.00% ^ Ex-Topmed investments

Allocation as at 31 December 2018

Segregated Mandate Benchmark R'000 %

Asset Manager

Old Mutual Wealth Trust Co (Pty) Ltd *Cash 210 427 16.12%

Allan Gray Ltd (CPI+3%) - 0.00%

Sanlam Investment Management (Pty) Ltd Absolute return CPI+3.5% 318 674 24.41%

Taquanta Asset Management (Pty) Ltd Enhanced cash SteFi+1% 464 123 35.55%

Truffle Asset Managers (Pty) Ltd Absolute return CPI+5% 312 278 23.92% Total 1 305 502 100.00% * Includes the Scheme's current accounts

Market performance to 31 December 2019

Performance to 3 Months 1 Year 3 Years

(%pa) 5 Years

(%pa)

% % % % All Share Index 4.60% 12.10% 7.40% 6.00%

All Bond Index 1.73% 10.32% 9.40% 7.57%

STeFi 1.74% 7.29% 7.36% 7.18%

CPI 0.35% 3.55% 4.55% 4.94%

Resource 20 13.77% 28.53% 20.52% 8.17%

Industrial 25 0.00% 8.89% 3.22% 3.45%

Financial 15 2.82% 0.63% 3.45% 3.94%

Financial Industrial 30 0.59% -3.37% 8.81% 5.34%

Top 40 4.54% 12.41% 8.25% 6.06%


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23 Financial risk management (continued) The Scheme's performance to 31 December 2019 Performance to Market value % 3 Months 1 Year 3 Years 5 Years

R'000 Portfolio % % % % Nedbank Ltd current account 14 081 0.84% 1.18% 4.75% 4.91% 4.74%

Old Mutual Wealth Trust (Pty) Ltd 129 694 7.78% 1.65% 6.88% 6.91% 6.72%

Taquanta Asset Management (Pty) Ltd 296 387 17.78% 2.56% 11.81% 12.30% 10.11%

Truffle Asset Managers (Pty) Ltd 360 089 21.61% 7.07% 16.00% 8.34% 0.00%

Sanlam Investment Management (Pty) Ltd 348 736 20.93% 2.81% 10.14% 7.91% 8.33%

Sanlam Investment Management (Pty) Ltd 95 850 5.75% 1.99% 8.75% 8.80% 8.72%

Sanlam Private Wealth (Pty) Ltd 185 220 11.11% 5.62% 9.67% 5.47% 4.33%

Allan Gray Ltd 84 197 5.05% 2.18% 7.04% 0.00% 0.00%

Prudential Investment Managers (Pty) Ltd 152 251 9.15% 1.07% 6.32% 4.83% 0.00% Total 1 666 505 100.00% 0.49% 5.91% 7.02% 7.23%

Consolidated benchmark CPI +3.5% 2.04% 10.26% 9.27% 9.17%


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Sensitivity analysis: Cash and cash equivalents - Medical Scheme assets

Basis

The sensitivity analysis determines different levels of the closing market value as compared to the actual closing market value based on different levels of investment performance (see table below) i.e. a 1% change suggests the closing market value could have been approximately R512m (2018: R585m) if the investment performance had been higher by 1% during 2019 as compared to the market investment performance. A 1% increase in the investment return at the reporting date would have increased cash by R4.73m (2018: R5.40m); an equal change in the opposite direction would have decreased cash by the same amount.

2019

% Change Index return %

Adjusted closing value R'000

Impact on accumulated

funds R'000 2% 9.29% 516 449 9 452

1% 8.29% 511 723 4 726 0% 7.29% 506 997 -

2018

% Change Index return % Adjusted closing

value R'000

Impact on accumulated funds R'000

2% 9.25% 590 446 10 810 1% 8.25% 585 040 5 404

0% 7.25% 579 636 -


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Sensitivity analysis: Equity and investment property funds

Basis

The sensitivity analysis determines different levels of the closing market value as compared to the actual closing market value based on different levels of investment performance (see table below) i.e. a 10% change suggests the closing market value could have been approximately R748m (2018: R347m) if the investment performance had been higher by 10% during 2019 as compared to the market investment performance.

A 10% increase in the investment return at the reporting date would have increased equity and investment property investments by R61.24m (2018: R34.20m); an equal change in the opposite direction would have decreased equity and investment property funds by the same amount.

The change will have an impact on the revaluation reserve and/or the surplus/deficit depending on the investment type.

2019




funds R'000 20% 32.10% 809 008 122 485

10% 22.10% 747 766 61 243

0% 12.10% 686 523 -

2018


value R'000


20% 11.47% 381 226 68 400

10% 1.47% 347 026 34 200

0% -8.53% 312 826 -


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Sensitivity analysis: Bonds and debentures

Basis

The sensitivity analysis determines different levels of the closing market value as compared to the actual closing market value based on different levels of investment performance (see table below) i.e. a 1% change suggests the closing market value could have been approximately R477m (2018: R417m) if the investment performance had been higher by 1% during 2019 as compared to the market investment performance. A 1% increase in the investment return at the reporting date would have increased bond investments by R4.29m (2018: R3.84m); an equal change in the opposite direction would have decreased bond investments by the same amount.

2019




funds R'000 5% 15.32% 494 423 21 438

1% 11.32% 477 273 4 288 0% 10.32% 472 985 -

2018


value R'000


5% 12.69% 432 218 19 178 1% 8.69% 416 876 3 836

0% 7.69% 413 040 -

Investment risk and investment return

Seeking higher investment returns is typically associated with taking additional risk through exposure to asset classes such as equities and bonds where the capital is at risk. Additional investment risk is typically associated with higher variability in asset prices.

Capital management

The Scheme’s policy is to maintain a strong capital base seeking a real return with limited capital volatility and strives for ongoing capital preservation. The Board seeks to maintain a balance between conservatively pooled and bond portfolios, selected from all asset classes and shares with limited downside.

There were no changes in the Scheme’s approach to capital management during the year. The Scheme is subject to externally imposed capital requirements by the Council and the Act.


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Analysis of carrying amounts and fair value of assets and liabilities per category

Asset class *The fair values for instruments such as short-term trade receivables and payables are not disclosed, as

the carrying amounts are a reasonable approximation of fair values.

Available-for-sale financial

assets Loans and

receivables

Liabilities measured at

amortised cost

Non-insurance

receivables and payables


and payables

Total carrying amount Fair Value

Level 1 Level 2

R'000 R'000 R'000 R'000 R'000 R'000 R'000 R'000

2019

Assets measured at fair value

Investments 1 159 508 - - - - 1 159 508 1 149 277 10 231

- Unlisted debentures 10 231 - - - - 10 231 - 10 231

- Listed equities 589 957 - - - - 589 957 589 957 -

- Listed fixed interest bonds 462 754 - - - - 462 754 462 754 -

- Listed investment property funds 96 566 - - - - 96 566 96 566 -

Assets not measured at fair value - 607 588 - - 191 761 799 349

Cash and cash equivalents - 506 997 - - - 506 997

Trade and other receivables * - 100 591 - - 191 761 292 352

Liabilities not measured at fair value - - (42 296) (195 428) (233 998) (471 722)

PMSA liability - - - (195 428) - (195 428)

Outstanding risk claims provision - - - - (209 237) (209 237)

Trade and other payables * - - (42 296) - (24 761) (67 057)

1 159 508 607 588 (42 296) (195 428) (42 237) 1 487 135


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Analysis of carrying amounts and fair value of assets and liabilities per category

Asset class *The fair values for instruments such as short-term trade receivables and payables are not disclosed, as

the carrying amounts are a reasonable approximation of fair values.

Available-for-sale financial

assets Loans and

receivables

Liabilities measured at

amortised cost

Non-insurance

receivables and payables


and payables

Total carrying amount Fair Value

Level 1 Level 2

R'000 R'000 R'000 R'000 R'000 R'000 R'000 R'000

2018

Assets measured at fair value

Investments 725 866 - - - - 725 866 709 378 16 488

- Unlisted debentures 16 488 - - - - 16 488 - 16 488

- Listed equities 258 136 - - - - 258 136 258 136 -

- Listed fixed interest bonds 396 552 - - - - 396 552 396 552 -

- Listed investment property funds 54 690 - - - - 54 690 54 690 -

Assets not measured at fair value - 588 522 - - 219 688 808 210

Cash and cash equivalents: Medical Scheme assets - 579 636 - - - 579 636

Trade and other receivables * - 8 886 - - 219 688 228 574

Liabilities not measured at fair value - - (3 844) (214 155) (190 122) (408 121)

PMSA trust liability - - - (214 155) - (214 155)

Outstanding risk claims provision - - - - (161 183) (161 183)

Trade and other payables * - - (3 844) - (28 939) (32 783)

725 866 588 522 (3 844) (214 155) 29 566 1 125 955


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Financial Instruments – Fair values and risk management

Fair value estimation The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Scheme for similar financial instruments.

Fair value of financial instruments

The Scheme measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable for the asset and liability from market data.

Level 3: Valuation techniques using significant unobservable inputs for the fair value measurement of an asset or a liability. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instruments’ valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The fair values and categories of financial assets and financial liabilities are disclosed on page 97.

Type Valuation technique Listed equity, bonds, investment property funds, debentures

These financial instruments are valued using the closing prices of the exchange on which they trade.

Unlisted debentures and bonds

Unlisted debenture and bond instruments are valued using a yield curve created by the asset management accounting system based on certain inputs, to discount cash flows, in order to determine the securities present value. This yield curve consists of published zero yield indices derived from observed market interest rates that represent the most liquid and dominant instrument for their respective horizons. These zero yields are combined into a standard periodicity, and linear interpolation used to fill time periods not available from the list of input yield index instruments.

Capital adequacy risk

This represents the risk that there are insufficient reserves to provide for adverse variations on future investment and claims experience. At the year-end the accumulated funds ratio computed in terms of the Registrar’s formula was 43.43% (2018: 31.42%). The Board believes that this cover is appropriate for the Scheme’s needs.


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24 Events after the reporting date

The Scheme are aware of the following events after the reporting date: COVID-19 On 31 December 2019, the World Health Organisation (WHO) China Country Office was informed of cases due to an unknown cause detected in Wuhan City, Hubei Province of China, which was later identified on 7 January 2020 as a novel coronavirus (COVID-19). The first South African case was confirmed on 5 March 2020. The patient was part of a group of 10 people who arrived back from Italy on 1 March 2020 and since then further cases have been confirmed. WHO recently declared COVID-19 a worldwide pandemic.

Fedhealth is on the alert for any emerging risks of this pandemic and will constantly review and align its internal processes and procedures to ensure that Fedhealth members are supported to receive the care they need. The Scheme is in close communication with our network facilities and practitioners and all role-players know how to deal with the various scenarios, in line with the Department of Health guidelines. There are designated hospitals in both the public and private sector where Fedhealth patients can be admitted in line with clearly defined protocols in the event of being faced with identified or potential cases. The Scheme is in further negotiations with pathology and radiology laboratories to ensure that standard operating procedures are clearly defined and that the best rates are negotiated.

The administrator has a task team that is tracking events as they happen and updating operations. Fedhealth can confirm that a positive diagnosis of COVID-19 is a notifiable condition, and that that the Scheme will cover costs for supportive treatment and hospitalisation as Prescribed Minimum Benefits (PMBs), subject to scheme rules (formularies etc.) per option. Stock Market Crash Global Stock Markets crashed on 9 March 2020. The markets having fallen further substantially since then. Notable contributing factors include the COVID–19 pandemic and the Russia-Saudi Arabia oil price war. The Scheme will engage with the Investment Portfolio managers to monitor the effects of this on the Scheme’s investments.

25 Contingent assets and liabilities

Contingent assets

There are currently 81 open (2018: 117) new road accident cases totalling R23.8m (2018: R22.0m) since 2017 managed by Medscheme. Batsumi Claims Management Solutions (Pty) Ltd will continue to wind down the 293 (2018: 492) outstanding road accident claims totalling R58.2m (2018: R87.8m) relating to the period before Medscheme took over from Batsumi. Berkowitz Cohen Wartski Attorneys (BCW) are currently managing the Topmed 128 cases totalling R22.8m.

Due to the uncertain outcome of claims to the RAF, the Scheme has not yet accounted for the inflow of economic benefits.

Contingent liabilities

The Scheme has no contingent liabilities.

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CONTENTS · 2020. 7. 7. · CONTENTS 3 - 29 Report of the Board of Trustees 30 Statement of...

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